By Wolf Richter: Italy has one of the most troubled economies in the EU. Businesses
and individuals are buckling under confiscatory taxes that everyone is
feverishly trying to dodge. Banks are stuffed with non-performing loans
that have jumped 20% from a year ago. The economy is crumbling under an
immense burden of government debt that, unlike Japan, Italy cannot
slough off the easy way by devaluing its own currency and stirring up a
big bout of inflation – because it doesn’t have its own currency.
Devaluation and inflation used to be Italy’s favorite methods of
dealing with its economic problems. It went like this: Politicians made
promises that they knew couldn’t be kept but that bought a lot of votes.
When everything ground down as industries were getting hammered by
competition from across the border, the government stirred up inflation,
and then over some weekend, the lira would be devalued. It was bitter
medicine. It was painful. It didn’t even cure anything. It impoverished
the people. But it temporarily made Italy competitive with its neighbors
once again.
Most recently, Italy devalued in 1990 and then again 1992 against the
European Exchange Rate Mechanism, a predecessor to the euro. Having to
take this bitter medicine time and again had made Italians the most
eager to adopt the euro. The idea of a currency that would be out of
reach of politicians and that would function as a reliable store of
value, run by the Germans as if it were the mark, and in turn, keep
politicians honest – all that seemed like paradise.
But it just hasn’t kept Italian politicians honest.
Only this time, their favorite tools are gone. The economy is now a
mess. Economic “growth” has been negative or zero for the last 13
quarters. And the country’s debt, no matter of how hard the government
tries to fudge the numbers, just keeps ballooning.
So, on Friday, ratings agency Standard & Poor’s woke up and cut
Italy’s sovereign credit rating to BBB–, just one notch above junk,
which is the dreaded BB. It cited the economy’s perennial shrinkage and
lousy competitiveness. The deteriorating economic fundamentals and a
political unwillingness to address the deficit were making the mountain
of public debt increasingly unsustainable.
The ECB has been busy doing “whatever it takes” to keep the cost of
funding this wobbly construct as low as possible. It lowered its own
benchmark interest rate to near zero. It instituted negative deposit
rates, it’s contemplating a big round of QE, all to keep Italy (and some
of its cohorts) afloat a little while longer.
The last time S&P struck out at Italy was in July 2013, when it
knocked the credit rating down to BBB from BBB+. This is a slow tango
that is falling further behind reality. Without the backdoor bailout
from the ECB, which is run by Italian Mario Draghi, Italy would by now
be discussing fashionable high-and-tight haircuts with its creditors.
And that would be a good thing for Italy – but no, wait….
These creditors include Italy’s largest banks who’ve been the
dominant buyers of this crappy debt, with money they get from the ECB
for free. It’s the easiest way to profit. Why even bother lending to
struggling Italian companies? Hence the ECB’s guarantee on the Italian
debt. It must not be allowed to blow up.
It just hasn’t done anything to solve Italy’s problems.
X art by WB7
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