Italian Elections, Now The Serious Part Starts

At the time of writing Berlusconi is still filibustering, but it seems to be simply that, rather than any serious attempt to derail the outcome of the electoral process. Meantime the financial markets are adapting themselves to the new reality.

I too am gearing myself up for what looks like being a very bumpy ride ahead. I have dusted off some of the rust from an old weblog I used to maintain – Italian Economy Watch. Many of the posts I have been putting up are simply recycled versions of material which has appeared here at Afoe, but it does at least serve the useful purpose of keeping all the posts tidily in one place. Recent posts include The Future Of Italy’s Young, Addio, Dolce Vita, Or Twilight of the Idols?, Italy Had Zero GDP Growth In 2005, Les Jeux Sont Faits, and The Italian Government Has A New Crisis.

But talking of new crisises, I fear Italy has a pretty old one (puns intended), and the ratings agencies are only just starting to get their minds round the problem.

According to Bloomberg,

Italy Ratings

The yield gap between Italian and German 10-year bonds earlier widened one basis point to 31 basis points after Romano Prodi claimed victory in Italy’s closest election since World War II. Prime Minister Silvio Berlusconi demanded a recount.

Goldman Sachs Group Inc. last week recommended investors avoid bonds sold by Italy, the euro region’s second-most indebted nation, because slowing growth means the country’s credit rating may sink. Moritz Kraemer, head of European sovereign ratings at Standard & Poor’s in London, said at a Feb. 8 press conference the company will judge whether to lower Italy’s rating after a new government is formed.

“The prospect now for any reform of Italy’s public debt must be close to zero,” Marc Ostwald, a fixed-income strategist at broker Monument Securities Ltd. in London, said in an interview. “I wouldn’t want to hold Italian bonds until they get to a spread that acknowledges those risks, and they certainly don’t at the moment.”

The Financial Times also takes a very realist stance:

As the nervous excitement mounted on Monday in Italy’s general election, it fell to Standard & Poor’s, a credit ratings agency, to strike a sober note of realism. Half an hour after the first exit polls predicted triumph for Romano Prodi – a forecast later overtaken by events – S&P warned that it might cut Italy’s long-term credit rating this year “unless there are signs of a sustainable and coherent strategy to reduce the public debt”.

It was a reminder of the hard work that lies ahead for the next government, whatever its political complexion.

S&P cut Italy’s rating to AA- in July 2004, making it the first eurozone country to suffer this humiliation. Last year the Italian debt rose to 106.4 per cent of gross domestic product, its first increase since 1994.

Moreover, Italy’s budget deficit climbed last year to 4.1 per cent of GDP, and the centre-right government disclosed during the election campaign that it was raising this year’s deficit forecast to 3.8 from 3.5 per cent.

The challenge that now faces Italy is how to restore discipline to the public finances, when it seems unlikely that either Mr Berlusconi’s centre-right coalition or the centre-left opposition will have legislative majorities commanding enough to force cuts in public expenditure.

The future they say is not ours to see, but sometimes if you look hard enough you will be able to see that the writing is already there, inscribed clearly on the proverbial wall.

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

2 thoughts on “Italian Elections, Now The Serious Part Starts

  1. “The challenge that now faces Italy is how to restore discipline to the public finances”

    This is really the pivotal question here but it does seem that Italy might very well be over the top. The crucial question here seems to be the Euro’s future and credibility on the back of Italy’s sorry public finances.

  2. An observation, until now Prodi has mainly concentrated (at least in the international press) on the EU instead of Italy´s structural problems. So far I still haven´t heard anything on how they plan to tackle that.

    What´s going here?

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