Parmalat Update

Well, well, what do you know: Paramalat’s real debt is much bigger than was first thought. What a surprise. According to the Financial Times Parmalat’s gross debt now stands between ?14.5bn and ?14.8bn ($18.08bn-$18.46bn). At the same time its main Italian operations barely made a gross operating profit last year. Meantime Italy’s unions are threatening a strike iif the government reduces the regulatory role of the central bank. The dispute has arisen as a result of the Parmalat scandal, which the government blames partly on a failure of oversight at the central bank. As a solution the finance ministry wants to reform financial market regulation in Italy so that the central bank would no longer supervise corporate bond issuance and competition in Italy’s banking sector. The unions object to this.

Actually this was meant to be a quick post, but while writing it I cannot help reaching the conclusion that Italy may be begining to fall apart. Just wait till you read this.

The struggle has coincided with a dispute over the euro that is adding to strains inside the ruling four-party coalition and threatening to turn into a campaign issue as Italians prepare to vote in local and European parliament elections this year.

Silvio Berlusconi, prime minister, last week told reporters it was undeniable that the euro’s introduction in 1999 had contributed to higher inflation in Italy.

At a weekend rally of his populist Northern League, Umberto Bossi, minister for reforms, went further and poured scorn on Europe’s single currency, saying: “The euro isn’t loved by the people a – it’s loved by the freemasons who wanted it and imposed it [on Italy].”

Among those springing to the euro’s defence were Romano Prodi, the European Commission president, who is tipped to lead the centre-left opposition in Italy’s next national election, due by 2006, and Carlo Azeglio Ciampi, Italy’s head of state.

The dispute recalled an episode in January 2002 when Renato Ruggiero resigned as Mr Berlusconi’s foreign minister in protest at the hostility of some fellow ministers towards the euro.

Rocco Buttiglione, minister for European affairs and a member of the centrist Democratic Union of the Centre (UDC), had harsh words on Monday for Mr Bossi. Commenting on the prospects for a relaunch of the government’s programme, he said: “In the last few days nothing has changed except that Bossi has heaped insults on us.”
Source: Financial Times

So what started off as a mere Enron-scale scandal (in a country which itself is almost bankrupt, see my earlier post) has now tipped over into a dispute which threatens the independence of the central bank (in a country where corruption is widespread, who exactly is expected to oversee whom?). Then in order that the milk can really boil over in the pan, the running sore of Mediterranean fringe inflation (again see this yesterday) spills into a generalised dispute along party lines about the euro, with the minister of ‘reforms’ making declarations reminiscent of the Mussolini/Franco era. What a mess!

Now back to the Parmalat details.

PwC, the accounting firm brought in to sift through the bankrupt dairy group’s accounts, on Monday said Parmalat’s net debt stood at ?14.3bn at the end of September. But debt was now slightly higher because of cash requirements, the Financial Times was told.

PwC also slashed Parmalat’s previous results for 2002 and the first nine months of 2003 after uncovering numerous cases of false billing, false financial gains and false transactions claimed by previous management.

Nine-month 2003 earnings before interest, taxes, depreciation and amortisation (ebitda) totalled ?121m, against ?651m declared earlier. Revenues were reduced by 26 per cent from ?5.38bn to ?4bn. Parmalat had claimed net debt of ?1.82bn, thanks to a purported cash hoard of ?4.2bn and stated debt of ?6bn.

The cash evaporated last month when it emerged that the group had faked statements and faxes with Bank of America letterheads, claiming it had ?3.95bn in a BofA account at the end of 2002 and ?4.4bn at the end of June.

PwC said liquid assets at the end of 2002 and up to September 30 2003 were “negligible”.

Unless investigators recover cash that may have been hidden by Calisto Tanzi, Parmalat founder and main shareholder, or other executives, Parmalat’s net debt will equal its gross debt.

Parmalat’s 2002 revenues were restated down from ?7.7bn to ?6.2bn, while ebitda stood at ?286m, down from the ?931m stated by Mr Tanzi’s management team. Mr Tanzi and Fausto Tonna, former chief financial officer, are among 11 people arrested since Italian magistrates opened a probe last month.

Under Enrico Bondi, Parmalat’s government-appointed administrator, the group has managed to stabilise revenues and cash flow at its large Italian and North American operations, according to one person.

However, Brazil, which once accounted for nearly a quarter of revenues before the depreciation of the real, continues to bleed cash. In Italy, Parmalat’s overall food operations probably have ebitda of ?50m-?60m, another person said. North American operations, in particular in Canada, also make a small profit.

The marginal gross operating profit could fuel hope that part of Parmalat could be kept running and that creditors could be willing to swap their debt for shares in a renewed and restructured group, observers said.

Mr Bondi, who is being assisted by Lazard and Mediobanca, is not expected to present a plan to creditors before March.

Parmalat said PwC’s work was “still in progress” and that Monday’s figures were “not final and are subject to change”.
Source: Financial Times

31 thoughts on “Parmalat Update

  1. but while writing it I cannot help reaching the conclusion that Italy may be begining to fall apart.

    What’s the reaction on the ground ?
    Are Italians buying Berlusconi’s excuse that this massive fraud is due to Euro-induced inflation ?

  2. That cuddly funster Umberto Bossi said:

    “The euro isn’t loved by the people a – it’s loved by the freemasons who wanted it and imposed it [on Italy].”

    The freemasons, eh? Surely the Jews and communists can’t be far behind.

  3. The freemasons, eh? Surely the Jews and communists can’t be far behind.

    At Forza Italia’s rally the other day, Berlusconi called the judges “communists”, so it appears to be open season on the time-honoured conspiracy-theory bogeymen…

  4. “What’s the reaction on the ground ?
    Are Italians buying Berlusconi’s excuse that this massive fraud is due to Euro-induced inflation ?”

    It appears Patrick that few Italians read blogs, which may in itself be indicative of something.

  5. what I’d like to know is where did they spend that money? How much of it would be recoverable? Will the Italians lern that electing a businessman is not an answer to ordinary political corruption?

    DSW

  6. Antoni,
    They may not have ‘spent’ all that money.
    Betcha a good portion of it was fake earnings, money that was never there, reported to prevent the stock from collapsing….temporarily.

  7. Pat,

    That would explain how the fraud was _perpetrated and hidden_, insofar as nobody would have lent those sorts of sums without the (fake) collateral provided by the 4 billion euros in the (fake) BofA account, amassed via (fake) retained earnings. However, it doesn’t explain what assets and/or expenses the cashflow provided by the (very real) debt went towards.

    Bernard Guerrero

  8. Fall apart? Not really. There could be a certain quantity of economic fallout, depending on the exposure of banks, how it’s handled and the success or otherwise of the cleanup operation. But Italy seems to get by through largely ignoring its politicians at the national level, relying on an effective technostructure.

  9. Are Italians buying Berlusconi’s excuse that this massive fraud is due to Euro-induced inflation ?

    From what I hear around and on talk radio, I’d say not.

    BTW, I heard that in Parmalat they were systematic in their frauds, there was even an operational manual for new hired accountants that listed all eleven ways they discovered to cook the books.

  10. The complaints againt the euro have been around all the time, and they’re not only coming from politicians, in fact, most do defend the euro in very fanatical ways, as if it was a magic potion, not a currency. There’s so much ideological praise of the EU among politicians it’s sickening. They never deal with the facts, never explain what would be the advantage the euro has supposedly brought. So well done to Bossi for breaking that general asskissing to Brussels.

    The complaints are from ordinary people striving to make ends meet now that prices have gone up, as elsewhere in Europe. People of all sorts of political orientation, or none, are angry about the price increases after the euro. Of course if you’re wealthy enough not to be affected by this, I wouldn’t expect you to grasp the origins of the anti-euro resentment. It’s got nothing to do with the Parmalat scandal, despite what any politician may say. The fraud started 15 years ago! So it’s ridiculous to use the euro as an excuse. Of course no one is buying that. But that doesn’t mean the euro is not responsible for other problems.

    There’s so much more involved in the Parmalat story, and it’s not just limited to Italian banks. They are pathetically denying any responsibility, when it’s obvious they knew about the fraud and what they did was basically shift the weight onto the buyers. Ditto for the non-Italian banks involved. Unless someone thinks Bank of America are clueless enough to let such frauds happen without thorough checking. Which would be ever more worrying really. Buyers were idiotic enough to think something with a 13% interest was safe, so they went asking for it, but the banks have been shameful. The Central bank is clearly responsible, that’s obvious to everyone. And I’m not a Berlusconi supporter, but on this the government is right. The Central bank has been untouchable for years, its chairment earn millions of euros and believe they cannot be made accountable for anything. They’re like emperors. The unions, sadly, are manipulated by the big corporate interests that have supported the system that allowed Parmalat to do what they did.

    But despite all this, no, Italy is not falling apart, thank you very much. You can spare the celebrations for now. This is different from Argentina, though there are similarities, but that was a lot deeper and related to the policies of linking the dollar to the Argentinian currency, not to mention widespread corruption at government level and the role of American banks and investors.

  11. I hadn’t read the extension yet – you write: ‘with the minister of ‘reforms’ making declarations reminiscent of the Mussolini/Franco era. What a mess! – yes, what a mess you made there in taking the FT’s report as gospel and not having a clue about the whole story. Again:

    - the polemics on the euro started ages ago. In fact, even before the shift to the euro. It’s not a consequence of the debate on Parmalat

    - the “freemasons” reference is to the cliques of the pro-euro elites, many of whom are overt and proud – or semi-covert and proud – members of Italian masonic groups. Which incidentally coincide with the financial interests that covered up for Parmalat. Nothing to do with Mussolini or Franco, there’s no reference to Jews or communists. It’s an internal reference to specific interest groups in Italy today, but of course not having a clue about Italian politics won’t stop anyone writing about it.

    - the Central Bank in Italy has not bothered with checking anything, that is the point of controversy, they are a unique institution that is not accountable and does not keep big corporations accountable. You should have listened to the Bank governor dismissing the whole fraud as no big deal, and dodging all questions about the responsibilities of the bank.

    No one is suggesting the Central Bank should no longer be independent. On the contrary, the idea is it should be MORE independent from those interest groups that were all accomplices in the fraud. It should be accountable, that’s the whole idea. They knew what they were doing when they covered up for Parmalat; otherwise they’d be totally incompetent.

    The main concern of those groups now is to emerge unscathed from this, not to fix the lack of transparency and REAL independence that caused this. That’s why they all find excuses for the banks.

    And by the way, while the Finance Minister has criticised the Central Bank, Berlusconi himself has just been defending it, as have others in the coalition who, like Buttiglione, are heirs of the old Christian Democrats system that thrived on this sort of corruption. Not suprising he’d stick up for his buddies now. He’s also in very good standing with the Vatican, whose banks, quelle surprise, are also involved very deeply in this scandal.

    In other words, you really have no idea what you’re talking about there.

  12. Unless someone thinks Bank of America are clueless enough to let such frauds happen without thorough checking. Which would be ever more worrying really.

    Yes ?

  13. Hi there,

    Nice of you to be bold enough to identify yourself.

    “but of course not having a clue about Italian politics won’t stop anyone writing about it.”

    Look even if the reference is internal, this indicates a lot. That cutural elites are referred to as ‘freemasons’ is a tremendous sign of cultural backwardness.

    “the Central Bank in Italy has not bothered with checking anything, that is the point of controversy”

    This again is the whole point, what kind of society produces a central bank like this???

    “the polemics on the euro started ages ago”

    Oh, I know this. Even the first day of the release of the money there was a huge controversy. Italy has always had a tendency to use inflation and devaluation as a form of fiscal policy: everyone sweats off their debts. This is why the euro was always going to be a problem in Italy. Now it is clear that it is.

    “And by the way, while the Finance Minister has criticised the Central Bank, Berlusconi himself has just been defending it, as have others in the coalition who, like Buttiglione, are heirs of the old Christian Democrats system that thrived on this sort of corruption. Not suprising he’d stick up for his buddies now. He’s also in very good standing with the Vatican, whose banks, quelle surprise, are also involved very deeply in this scandal.”

    One more time: what a mess!

    “Of course if you’re wealthy enough not to be affected by this, I wouldn’t expect you to grasp the origins of the anti-euro resentment.”

    I’m not especially affluent, and my wife does complain to me every week about prices here in Spain too. The point is (and BTW I’m convinced the euro won’t work) that this inflation in the South of Europe is not directly a product of the euro: it is a product of what Modigliani (an illustrious Italian) called money illusion. Southern european societies have endemic inflation problems in the mentality of the people: everyone expects prices to go up and so they put them up themselves. This is to do with not being fully functioning market economies, lots of things. But unfortunately it is a reality. Now after the party the factories are starting to close. This was to be expected wasn’t it?

    “is different from Argentina, though there are similarities, but that was a lot deeper and related to the policies of linking the dollar to the Argentinian currency”

    This is exactly the problem: the situations are identical in principal. The Lira has been attached to the Deutsche mark, something that should never have been done. I’ll stick my neck out: Italy *will* go the way of Argentina, and before too many years are out. If Krugman can get away with saying that the US can do it, then why not, Italy sure as hell is a much stronger candidate.

    The real question is we have a monetary union which is threatening to break apart in the North (the Netherlands – the only participant with significant pension reforms early enough, and self proclaimed champion of trying to keep to your agreements) and from fiscal wrecklessness in the South (Italy): big problems are looming.

    I only wish I had no idea what I was talking about.

  14. Quote of the week:

    “”Parmalat came at a particularly nasty time because of the great borrowing needs in Italy,” says Ruggero Magnoni, vice-chairman of Lehman Brothers Europe.”

    From the Business Week referred to by Doug (see post above)

  15. To “An Italian”,
    There may be a disconnect between what we think is a Central Bank’s role.

    In the U.S. at least, our central bank (the federal reserve) in its role as a bank for banks sets reserve requirements and some interest rates, based on the statistics it compiles on economic conditions. However, it does not play a regulatory/auditing role.

    Most U.S. citizens, and even one presidential candidate, don’t understand the role and function of the Federal Reserve. So if our Politicians were talking up the Fed’s failure to address a multitude of problems, and suggesting “reforms” to alleviate fix said problems…

    I’d be very suspicious.

  16. Pat,

    “In the U.S. at least, our central bank (the federal reserve) in its role as a bank for banks sets reserve requirements and some interest rates, based on the statistics it compiles on economic conditions. However, it does not play a regulatory/auditing role.”

    Not true, actually. The Fed actually has supervisory and regulatory functions with regards to bank holding companies (a biggie in this era of cross-state mergers), state-chartered members of the Federal Reserve System and some foreign banks. It’s the ECB that has little in the way of a regulatory role, that having been held onto by the national central banks.

    As to the BofA commentary by “the Italian”, the fraud to date appears to be totally on the side of Parmalat. I can claim I have a million bucks on deposit with you right now, but that don’t make it so. :^)

    Bernard Guerrero

  17. Bernard,
    Score one for you. Somehow, “Banking Supervision & Regulation” doesn’t seem to get press coverage like its other functions.

    That said, what information I dug up doesn’t seem to indicate that the Federal Reserve audits at the level of individual bank customers and their multiple accounts. So if Parmalat had been based in Wisconsin rather than Italy, I’m not sure that Federal Reserve oversight would have caught it.

    If I were a banker/auditor/regulator, I’d want that Parmalat operating manual to test against my fraud-detection systems…

  18. Patrick G – in response to your “?”, I was just implying that since US banks are involved in the affair, it is very naive to imagine they – like Italian banks and auditing services – were completely unaware they were lending millions of dollars to a company involved in this sort of financial fraud.

    Edward: I don’t understand the thing about being bold enough to identify oneself. If I used my name would it be different? you are some unknown “Edward” too. Is it required to give one’s address, telephone number and social security card to leave a comment? Didn’t think so.

    Second. Your reply confirms exactly what I was saying. I don’t expect you to get it, because you are not Italian and probably don’t live in Italy, right? But still you think you know more about it . OK. You say: “That cutural elites are referred to as ‘freemasons’ is a tremendous sign of cultural backwardness” – no, let it be clear: I’m not saying ALL cultural elites (cultural? who’s talking about cultural elites? We’re talking financial and political untouchables like the Central Bank governor, those involved in this mess) are referred to as “freemasons”, or by all politicians/people. But, for isntance, have you ever heard of the financial scandals involving Gelli, Calvi, the Vatican banks, the P2, etc. years ago? There you go, that’s the “freemasons” in recent Italian political history. It’s completely different from a US or British context. It’s been more of a refrain of the left than of the far right to attack those “freemasons” involved in that sort of financial operations.

    You don’t have a clue about the context there, that’s all. It’s got little to do with a nation’s culture – which for me is at the level of ordinary people and daily life – and a lot to do with the financial-political structure of certain elites. That’s where there’s definitely a “backwardness”, or rather, a mess, indeed.

    But you can’t mix that with a nation’s society, or culture, or people. We’re talking something done by those big elites. A 3% at most. The engine of the economy and society is elsewhere.

    This again is the whole point, what kind of society produces a central bank like this???

    Oh dear. What does society at large have to do with that? ‘Society’ doesn’t decide about the Central Bank. Do people get to control who runs the European Central bank and how? The Federal Reserve? The Bank of England?

    Then of course in Italy it’s worse because of the corruption in politics and finance at big level. But it’s not something depending on the cultural or social level of the country. How can you not understand that, I don’t get it.

    Southern european societies have endemic inflation problems in the mentality of the people: everyone expects prices to go up and so they put them up themselves. This is to do with not being fully functioning market economies, lots of things. But unfortunately it is a reality.

    Yes, in part, but regardless of that, the price rise is not related to an “endemic mentality”, prices did double in a year. Doesn’t mean before it was better. It just means no country in Europe controls their currencies any longer. It’s been forced upon countries to accept the euro. It may have its advantages, but at the consumer level – which is the only one I’m interested in, frankly, cos I’m not in big business or finance – it’s brought far too many disadvantages.

    Not just in Italy, from what I hear.

    Italy *will* go the way of Argentina, and before too many years are out.

    Maybe, I don’t know, I hope not. But the case of Argentina was even more messy, not just related to national debt (which in Italy is huge, and entirely the fault of the previous Italian governments in the past fifty years, nothing to do with the euro of course). There was a lot of speculation from abroad too.

    So what I don’t understand is this way of looking at it I read through posts and comments here – as if it was somehow a fault of “mentality”, “society”, of an entire country, and not the direct fault of those directly responsible for it.

  19. Patrick G: regarding the regulatory/auditing function of the Central Bank, the thing is, they were lending huge sums of money to Parmalat, and are now saying they had NO IDEA of the real situation because the auditing reports from auditing services were all fine. Both (Italian and non-Italian) banks and auditing companies are saying they had no idea. So, they’re saying they were clueless. And that the Parmalat managers were so sly and clever they fooled everyone from the Italian Central Bank to those British auditors to the Bank of America.

    I don’t think that’s possible one bit!

    The consequence of the financial tricks is that Parmalat’s debt was unloaded onto those buying bonds – under strong pressures and reassurances from banks.

    It’s clear it was to the banks’ own advantage too, to participate in the scam.

  20. Bernard Guerrero – As to the BofA commentary by “the Italian”, the fraud to date appears to be totally on the side of Parmalat. I can claim I have a million bucks on deposit with you right now, but that don’t make it so.

    Yes, of course, but if you have to go to auditing companies to get reports covering up your fraud, and to banks to get loans, and sell bonds, well, normally you’d expect them to check everything in detail.

    Even if you want to open a bank account with just 1000 dollars you will have to go through scrupulous checking and controls.

    Which didn’t happen here. How odd.

    Did you read about the whole thing? How do you explain the behaviour of banks, if not in terms of conscious participation in the fraud?

    It’s either that, or total incompetence, which is not even feasible.

  21. “Do people get to control who runs the European Central bank and how? The Federal Reserve? The Bank of England? ”

    This is the point, the whole thoery of central banking is ‘we’ (since I too am a person) shouldn’t control it. It is meant institutionally to be beyond politics.

    But the quality of institutions is a reflection of a society and its culture. I don’t see how you can separate the two. And I don’t see how you can exonerate the ‘people’ from the society they have produced: whether actively, or by omission.

    I think incidentally I do know just a little, since Spain suffers from the kind of clientism and corruption you describe. In the end, the ‘people’ get the kind of outcome they deserve. And my BIG question is that if Italians haven’t had the capacity to resolve these – as you yourself admit – lamentable issues when Italian society was young and in its prime, what hope is there for a elderly Italy (a gerontocracy?) to get to grips with the situation?

    The big danger, in my mind, is that you get some kind of ‘radical demogogic’ government promising to clean all this up, with the hidden agenda of eliminating a big slice of the costly aged.

    The other scam I fear, is that the ‘boys who brought you Argentina’ (people like Menem etc) in Italy could mount a – for them profitable – operation by taking Italy out of the euro, while salting their own money in Euros, declaring a Feria Bancaria of say one week, and then converting the money back into New Lira at the rate of say 3 to 1. Quite an operation, but not entirely impossible given what you are explaining. I mean what happened in Argentina was the fault of the currency peg, but there were also plenty of people in there egging it on, and taking profits.

    On the identity thing, and BTW you can find my links in the sidebar here, I just think that it is more friendly to have a conversation with a name, even an invented one. Something about personalisation.

    Also this kind of thing is normally associated with ‘trolling’.

    Now as we get to the end of your comments I hear a more human voice, and it’s that voice I’d be interested in having a dialogue with.

    You are right, none of us here really know enough about Italy, and we would be interested in learning more, but it is hard to see whether you just want to run some hackneyed ideas (like elites as freemasons) or really want to explore what could be done about your country, all of us together, since that is what Europe (as an ideal) is about, all helping each other. So I am concluding this not by trying to score points (you will notice I am not replying to some of your references to me which might be considered rude), I am trying to open the door. Having someone from Italy around here commenting, and debating – and who knows one day even guest posting – would be definitely a good thing.

    In the end my biggest difference with you would be over the distiction ‘people’ and ‘elite’: for me the two go together, culture is something organic, not something imposed.

    And please, I am not anti-Italian. Dino Buzzati is one of my favourite writers (along with Pavese, and Moravia, Calvino etc), and Visconti one of my favourite film directors (along with Bertolucci, Olmo, Moretti, Rosselini etc etc). On my website I have music from Gianmaria Testa and I could go on and on (I did share some of my younger life with an Italian girlfriend, learn to speak a batterred and broken Italian etc etc).

    What I don’t like is ideology, from whichever end of the spectrum it may emmanate.

  22. “So what I don’t understand is this way of looking at it I read through posts and comments here – as if it was somehow a fault of “mentality”, “society”, of an entire country, and not the direct fault of those directly responsible for it.”

    I accept what you are saying here in the sense that I may have given the impression of trying to exonnerate these people, this was not my point.

    In a way the whole thing is circular, since the the problem is where do you start. i may have been too provocative, since my concern here is not to score points but to avert disaster.

    My specialism is ageing and its economic consequences, and this is my real concern for Italy’s future, without that backdrop I would find it much more plausible to consider the reform possibilities.

  23. Edward: my name is Laura, and I’m not “trolling”, otherwise I would have written a bunch of insults and left it at that. I found what you wrote interesting, that is why I commented on it. If you think that was trolling, well you haven’t had real trolling – or even just disagreement! – around here have you? :) If I wrote anything that sounded “rude”, it’s because I felt genuinely irritated precisely by the perspective you summed up above, ie. seeing no distinction between people and elites involved in the corruption case, and attributing the Parmalat scandal or any other huge corruption case to a general Italian “mentality”, and the responsibilities for “fixing” the situation to Italian citizens.

    That is a political mentality I just don’t comprehend, because it doesn’t correspond to reality.

    The perpetrators of this fraud were Parmalat managers, auditing companies, banks, and their political counterparts covering up for them. You tell me, what on earth do “people” in general have to do with that? How come it’s so much easier to let the Italian Central Bank and Bank of America off the hook, when they were the ones to deal with Parmalat’s finances, while somehow chastising Italy in general for this, it seems like turning it all on its head to me.

    You say you didn’t mean to exonnerate those directly involved, ok, but you surel spent more time writing about how the source of the problem is the Italian social and cultural (no less!) mentality in general… Perhaps we mean something entirely different. Social and cultural mentality to me is something largely separate and independent from politics, because it happens at daily level, at personal interaction level, whereas politics (and big finance) is a system that feeds itself and acts within a very small sphere, even as if it affects a country hugely because of the power it has.

    About the “freemasonry” thing – I’m not bringing that in myself! I’m merely explaning what was being referred to by Bossi’s statement, what that reference means in an Italian context.

    I honestly don’t know about the comparison to Argentina, but even there, I’d have never dreamt of explaining what happened in terms of the country’s society or culture.

    About the meddling with Argentina’s debt, this may be interesting in case you missed it:

    Washington Post – 3/08/03 – Argentina Didn’t Fall on Its Own: Wall Street Pushed Debt Till the Last

    And also this letter.

    The strongest similiarity there to me seems that everyone (among the bigger players) knew what was going on, and exploited the situation. That’s what banks, Italian and foreign, clearly did with Parmalat. They can’t have been fooled so easily by balance sheets so faked they wouldn’t even fool your local bank into lending you 4,000 euros to buy a new car…

    In Italy there’s tons of checks at small and medium level for companies and individuals, but the big corporations with the “right” political support can get away with anything, especially if banks can join in the profits.

    I was not accusing you or anyone here of being anti-Italian – I’m not the kind of Italian that gets all nationalist like that and can’t stand criticism of my country, believe me. I live here, I’m the first to see what is wrong with it.

    But what I can’t accept – not just for my country, but also for Argentina, for the UK, for any place in the world we may be talking about – is that confusion of different levels, that kind of generalisation, that tendency to blame ordinary citizens for things they could not be responsible for in a million years.

    I can see you didn’t exactly mean that, but still, I don’t understand what a “cultural mentality” has to do with the topic here. Except if we’re talking of the culture of big financial and political groups, which is not “the” Italian culture! It’s two different, separate worlds.

    We’re not talking of small habits that confirm clich?s about Italians always trying to ignore or fool the law, you know, like driving recklessly over the speed limits or not paying the tv licence. We’re talking of a 14bn fraud involving huge financial and politican connections. The Parmalat helicopter was used by the Vatican for diplomatic missions. If that’s not an elite thing, I don’t know what is.

    And in any country, the elites can have their good and bad parts, but they sure don’t live on the same planet that ordinary citizens live in.

    Everyone is outraged not just at the corruption, but at the way this is being handled by the Central Bank (and by the government, who’s been very contradictory, and very split, on this) and the banks that pressured buyers into trusting Parmalat. You should have heard the first-hand accounts of people who invested. There was clearly a huge pressure into pushing Parmalat bonds above all others, which is another hint that the banks knew and wanted to get rid of the mess by unloading it on customers.

    The sad thing is, Parmalat has good products. I hope the farmers and workers don’t get to suffer the consequences of the managers financial tricks. See, that to me represents clearly the gap between the people and elites (I use these terms for easier reference, not for populism). Between those working, producing, creating something – and those acting at a level where the money can be faked and financial tricks played. Italy is still strong in the first level, because of people working. That is the “mentality” of people. If the latter level can bring down the first, it SURE has nothing to do with society or culture, but with leaders using the work of other people to scam as much as they can, instead of creating more working and production opportunities. That’s the tragedy of these cases like Parmalat, Cirio, etc. When the big managers care more about financial games for their own gain, and even in spite of the law, than about creating wealth for everybody. These are the people that can ruin any country.

    That’s why it’s irritating to mix the two levels. The second is screwing the first, and doesn’t even care about the possible financial collapse of a whole system.

    In the end, the ‘people’ get the kind of outcome they deserve.

    No, Edward, it’s the exact opposite. Try saying that “you got what you deserved” to one of the Parmalat workers risking their jobs because of Tanzi & co, or one of the people who were “warmly encouraged” by their banks to invest their 20 or 30 thousand euros in Parmalat bonds.

    Do you understand what I mean now?

  24. My specialism is ageing and its economic consequences, and this is my real concern for Italy’s future, without that backdrop I would find it much more plausible to consider the reform possibilities.

    Well, reform has little to do with the Parmalat case and such. Or rather, it’s not something that can be solved by new laws or political reforms, not in the short term. There is a power structure in Italy that is completely opposed to the slighest suggestions of reform. See the ideological and rhetorical opposition to the proposals of decentralising the system. The mentality and behaviour of those in *power* needs to change, not just the structure of the state. And it’s not something likely to happen.

    The ageing problem is also used rhetorically precisely to push the interests of those in power. All Italian governments pushed the deficit into stellar figures by protecting only their own interests and spending and robbing the state, and then they tell you Italy needs more immigrants to pay Italians’ pensions, because the population is declining.

    So, have more kids, people. So that we can suck more money out of you to fill in those holes we (politicians) created. Ugh.

    From a social point of view, I think it’s more than normal that the fertility rate went down. It’s also a good thing. If Italians are having less children, it’s because a) only fifty years ago, they were having too many (before the economic boom of the fifties, sixties, seventies, etc, a large part of Italy was still rural, uneducated, strictly Catholic; our grandparents had families of 12 each…!); b) the density of population in urban areas is becoming unsustainable; c) the cost of living is also becoming unsustainable for many people with ordinary jobs.

    Still, I sometimes get suspicious on figures about the fertility rate. People are having kids later in life than in older generations, definitely, but still they’re having them, and not just one each. You have to book your kids in kindergarten years in advance or you won’t get a place. In primary schools, there’s more teachers than decades ago, that’s what’s changed the ratio. Where before you had one teacher for a class of forty, now you have five for a class of twenty.

    But even if it’s true that the population is declining, the politicians are only exploiting that for propaganda, not doing anything real to fix the economic consequences. You don’t just come up with some silly “1,000 euro for your second child” scheme, or get the Pope to have a speech encouraging people to make more children. You go at the root of the problem, ie. public spending, the deficit, the elephantiac structure of this centralised system. IF ONLY they fixed that, we wouldn’t need to worry about the fertility rate for another 200 years. But since centralisation and public spending and privileges for the elites is what interests them, they won’t do it.

    Compare what the governor of the Central Bank in Italy earns to what Greenspan is paid, and you’ll see what I’m talking about. Compare how much MP’s are paid in Italy to what they get paid in the US Congress. Compare what any minister makes to what the President of the US is paid! It’s incredible Italy is still standing, with all the money these bastards are sucking.

    That’s where the problem is, not ageing.

  25. PS – Edward, no chance Italy will ever leave the euro. Even the anti-euro elements like the Northern League know this. Too late now, it’s impossible. But it’s not demagogic to believe that decentralisation, federalism, devolution would – if done right, which is not happening – “clean things up” a lot. That’s the strong point of Bossi, for all the populist talk and folklore and racist idiocies, what his party has been demanding there would enormously improve the political and financial system in Italy. But it would threaten the existing elites that thrive on centralisation and unaccountability, so that’s why it gets such ridiculous opposition, even from inside the government.

    - Buzzati is one of my all time favourites too. If you ever read the short stories, there’s a very kafkian one where the protagonist is moved from one floor to the next of the hospital, without explanations, and he doesn’t even get told what his illness is, the doctors keep reassuring him, and he keeps getting moved further and further away from the real world… It has something so very Italian…

  26. Buzzati. Well this is much more interesting. I know and love that story. It is in a collection called Catastrophe, which I can’t quite locate right now. I always thought of it as a kind of parody of Mann’s magic mountain.

    My favourite is still the Tartar Steppe.

    I’ll get back on your others points later when I have a bit of time.

  27. Ok first of all let me say that I am very grateful for all the effort you have put into writing comments here and trying to teach me some things. Please believe me this is not wasted, as I am interested in what you are saying, even if I don’t have to agree with everything :).

    And hi Laura, nice to have a name to talk too. Also I apologise if we got off on the wrong foot. I can imagine you were irritated, it is part of my way of saying things, to try and provoke discussion. Seems like I was successful :).

    Even if not many are commenting, others are watching, and reading, and thinking about Italy and its problems, and this is all to the good.

    “There is a power structure in Italy that is completely opposed to the slighest suggestions of reform.”…………”The mentality and behaviour of those in *power* needs to change, not just the structure of the state. And it’s not something likely to happen.”

    I think we are not too far apart on this. It is what worries me. So if we write the absence of change into the equations, what do we get? And believe me Spain, which I do know well, isn’t so very different.

    “From a social point of view, I think it’s more than normal that the fertility rate went down. It’s also a good thing.”

    This may well be right, some people even argue that the planet is ‘over’ populated, but seeing that you’re high on heroin is one thing: getting off it is something else.

    We have an economic system which is hooked on growth. Maybe we should have thought about all this before, but it is the one we have, and I am concerned with the consequences of throwing the switch the other way, and having sustained economic contraction, which is what you will get if the number of working people begins to fall year by year.

    Of course all this is complicated, because some people argue that this tendency can be overcome by making the remaining ones more productive, but here we hit the problem of large scale outsourcing of information services, and the impact of this on the so called ‘value added’ activities.

    I don’t expect you to be in a position to take a view on this, the thing is so technical and complicated that few are, but all I can ask you to do is pay attention to what is happening and form your own opinion over time.

    “People are having kids later in life than in older generations, definitely, but still they’re having them, and not just one each.”

    This is an interesting argument, and important, but first I want to do a bit of self pubicity. You should go to my site here:

    http://www.edwardhugh.net/demography.html

    and check out:

    the arguments by Wolfgang Lutz about the consequences of delaying age at mariage and first child.

    the ‘surprising’ explanation of economic historian Greg Clark for the industrial revolution in the UK based on the lowering of the marriage age and the subsequent population explosion.

    my article: what can be done about declining fertility.

    and anything else that takes your fancy.

    What we have on our hands is the unwinding of a process that has been going on for a couple of hundred years. Really we can’t do much about it, but we should try to live it as best we can, we should try to think of the plight of those elderly people who may be impoverished if there is a big problem in the pension systems. And we should try to work towards the proverbial ‘soft landing’.

    You are obviously an extremely intelligent person, so if you are interested in trying to see just what the interlocking set of problems lying behind this really is you could go over to this post on my blog and read through the thread:

    http://www.livingontheplanet.com/bl/archives/000108.html

    There you will se that we are not a bunch of yes people, and I personally would welcome your active participation in the debate we are about to have.

  28. “no chance Italy will ever leave the euro. Even the anti-euro elements like the Northern League know this. Too late now, it’s impossible. But it’s not demagogic to believe that decentralisation, federalism, devolution would – if done right, which is not happening – “clean things up” a lot. That’s the strong point of Bossi, for all the populist talk and folklore and racist idiocies, what his party has been demanding there would enormously improve the political and financial system in Italy”

    On Italy leaving, i take your opinion as a valid one, it puts the demagogy in perspective.

    Of course I have an altogether separate argument that the euro can’t continue as it is up my sleeve :) – but we’ll leave that for another day.

    I agree entirely about decentralisation.

    “Between those working, producing, creating something – and those acting at a level where the money can be faked and financial tricks played. Italy is still strong in the first level, because of people working. That is the “mentality” of people. If the latter level can bring down the first, it SURE has nothing to do with society or culture, but with leaders using the work of other people to scam as much as they can, instead of creating more working and production opportunities.”

    Look I am hearing all this, and I sure appreciate the tragic element here. I felt deeply sorry for all those people who lost their money in the bank ‘lock-in’ in Argentina too. But, unfortunately, we still come back to the problem of why the people ‘tolerate’ all this.

    Why do they sit round night after night watching all those singing contests on TV, or the girls in swimsuits, or all that football, and why do people want so many highly paid footballers in the South of Europe. What is wrong here?

    Why, whatever his corruption and his faults, does someone like Chirac seem to think about the needs and future of the entire French people, whilst here in Spain the ‘Caciques’ – which is what we call the elites – have a motto which seems to go ‘que se joden’ (f**k them).

    Part of me says you have to go back to the feudal system and the evolution of reciprocity and mutual servitudes to understand this. Why for eg did we have Watt Tyler and the ‘levellers’ in the UK?

    I don’t know, and there is no easy answer. But what I feel is it is too simple to exonnerate all those inveterate couch potatoes from the fact that they are couch potatoes. What did you do in the war mum, could also be rephrased ‘what did you do during all those years when we had democracy’?

  29. Edward, thank you for the replies and the understanding, now don’t overdo it with the flattering! :) I’m glad we got to understand each other here, and yes, we agree on a lot of things.

    I have no real objection to most of what you wrote above. I did read some of your articles, yes, very interesting one on demography. It’s true, I don’t have knowledge of theories there so I can’t really comment. I’m only giving you a few first-hand impressions, from me personally and people I’ve spoken to about this in Italy. I too think it’s absolutely true that we’re hooked on growth, like you say, but we have to find a way to adjust to the new trends, or correct them as far as possible. There is an article in the main Italian newspaper today about the “kindergeld” scheme in Germany, with monthly subsidies from 140 euro for each kid until they’re 18 for families making under 30k euro a year – which sounds a LOT better than the one-off 1,000 euro the Italian government hands out for the second child. The latter was a populist move, whereas the kindergeld – or subsidy schemes like in Scandinavia, as you noted in your article – sound to me like much cleverer measures.

    I just want to add another thing to make it clearer what I meant about the Parmalat case, when I said everyone must have known, banks included: you may have heard, the magistrates interrogated a comedian who said two years ago that he’d spoken to one of the Parmalat managers who said they were hugely indebted and “in a normal state of affairs, we should close business tomorrow”, but they were still keeping it all running with financial tricks. Now, when a comedian doing theatre knows more about such stuff than banks… its tragicomic really. And not just him, some newspapers – notably the Sole 24 Ore, the main financial newspaper in Italy – had written about concerns about the financial state of Parmalat, that there was something wrong. Why did banks take so long to realise? Again, the only feasible explanation is they knew, and joined the scam.

    The one thing I really keep objecting to – and I apologise if I took it personally and responded aggressively on this at first! – is your insistence on the responsibility of the people, customers, buyers, workers and… couch potatoes.

    Really, Edward, in any country in the world, couch potatoes cannot control the financial movements of big corporations or the stock exchange or football clubs.

    It’s not a matter of “how can they tolerate it” – that’s a question implying the assumption they can DO something about all that.

    Now tell me, what can a construction worker, a secretary, a teacher, a mechanic or a nurse do about it, if Juventus FC for instance (but it could be Manchester UTD or Chelsea) wants to pay Ronaldo or Beckham or you name it 28 billion in three years?

    What could they do, short of a working class revolution? ;D

    Seriously. Those are markets that are partly inflated – and there’s talk in Italy about the upcoming “exploding” of Parmalat-like cases in the football world too, so, keep an eye out for that one! – but it’s also true they make huge sums of money flow, from advertising, from broadcasting licenses, from all the activities connected to one of the most lucrative sports worldwide.

    They pay footballers huge sums in Brazil too, and that’s a country with a bit more problems with poverty than Italy.

    Who can stop that? No one! It’s a free market, and the downside of it is you can have that sort of excesses.

    That, in general. Then, in Italy, the football clubs are deeply linked with banks too, there you go again, sometimes some banks and clubs belong to the same owners or groups, so there’s a whole lot of financial tricks.

    I don’t see how you can blame that on the “couch potatoes” – for which I have a lot more respect than for the banks, personally! It’s not a question of “exonerating”, it’s a question of WHO has the direct responsibilities here.

    I work with the internet so have time to read and follow news a bit more deeply. But I can’t do anything about those things that enrage me either! Apart from voting. But that doesn’t affect those things we’re talking about, either. So…

    I can’t blame people who work all day in an office or factory or anything, and have to spend hours commuting, and only want to watch some silly tv show or movie when they come home, instead of reading pages and pages of reports about the Parmalat case or the Hutton enquiry or anything else – an activity which will leave them just as clueless and definitely just powerless as before.

    Democracy doesn’t mean people’s control on big finance, or intelligence, or media. So instead of “what did you do when we had democracy”, the question should be a lot more precise: what are the responsibilities of those who did damage to a country and how can they be brought to responsibilities. We elect politicians to take care of that, in theory, at least. And of course, it’d be great if there was more pressure on politicians and on media too, since they hold such power. So of course people need to be more aware and involved and protest what they can and should protest, but democracy is never direct, it’s a mediated business. And say, if my banks was involved in the Parmalat scandal, and I have my miserable 5000 euro on one of their bank accounts, what do you think, that me withdrawing that money will be a strong statement of disapproval that will affect them? Again, it’s those who are directly responsible that are responsible. hose with the most power and involvement, are expected to behave even more responsibly. And you can say, in a democracy it’s all connected, yes, but there’s levels where the connection is broken, and some levels of power act outside of democratic (people’s – not politicians) control – esp. with financial institutions.

    Perhaps there are also identifiable faults in the mentality of Italian people in general, that allow politicians or bankers or “the elites” to get away with murder. OK. But I tend to think that, in any country, if the “powers” want to get away with murder, they can. People have to lead their lives, work, play, get married, have kids :) and keep the whole engine rolling.

    It seems like a reversal of role to me, to expect more reaction and responsibilities and duties from people above what their possibilities and responsibilities are, than from the top level which is directly involved.

    I can’t say about France or Spain, as I really don’t think there’s too many similarities in this respect – maybe more with Spain, at the social level, yes, even with Argentina, it’s “Latin” countries so there’s something common at the mentality level. But at the level of political, financial organization, power structure, I don’t know. I think it’s best not to generalise there. Italy has its peculiar political and financial flaws. And they do have roots in peculiar Italian history.

    I just would keep very separate the social level from the political one. There is really too wide a gap there. In Italy, as long as there is such a hugely centralised system, with such huge privileges on those governing, and a parallel non-elected class of highly paid burocrats, and institutions that are unaccountable, and a state media that thrives on nepotism and political favours and scamming people and wasting public money, trade unions that are only political branches serving bigger interests instead of the workers’, and the Vatican involved in such a big slice of political and financial life in Italy – to mention just a few things that are seriously wrong – things are not going to improve. No matter who is at the government. It’s the same, left or right, the system is still upheld as is. It’s the foundation that needs some serious shaking. But when have you heard of a system shaking itself into losing privileges? It’s easier for it to implode.

    So perhaps Italy will go the way of Argentina; we joke about that too, to exorcise the thought. I apologise for reading some “you deserve it” implication in your original statement about that, Edward, I hope you understand that being here, in Italy, with people so enraged about all this, it just doesn’t sound fair to hear the “heavy” questions about responsibilities directed at working citizens who are the first to suffer the consequences of bad government or financial wrongdoings.

    I still think Argentina had bigger, deeper problems, and more widespread poverty even before the collapse. So I hope the big catastrophe won’t happen. But somehow, it may be worse if things stay the same, while someone pretends they are changing…

    Well, I’ve written too much now, hope I haven’t bored you all. I don’t know a thing about economics so I trust you’re more knowledged than me there! I have no idea how things will go with the euro. It all looks schizophrenic. On the one hand, prices have gone up, and families who managed ok a few years ago are having problems, on the other, say, for Christmas holidays everything was booked out, restaurants were packed, airports invaded… ironically, the prices for, say, a 2 week trip to Mexico have gone down, but a two-month shopping at the supermarket will make you spend about the same… A cell phone costs less than four steaks or a kilo of mussels. A plane ticket to London, less than a pizza. It’s crazy, isn’t it? :)

    I am optimistic because there’s lots of small and medium companies doing fine or new ones opening, and that’s what’s always been driving the economy in Italy really. There’s problems there too, but I think the big trouble affects more the big corporations, those who substituted production with financial recklessness. Apparently, Fiat and Telecom Italia are about to go the Parmalat route too, since they’re hugely indebted, and said to be involved in similar frauds with banks.

    So you’ll likely have lots more to chew on there, soon :)

    Thanks again for the interest, and for your kindness in replying. My apologies if I was a bit rude at the start. (And for not using my real email, but I’ve had to close two accounts for spam lately so I’m reluctant to leave my new, pristine, spam-free one on websites!)

    Cheers,

    Laura

  30. Laura, what a termendous explanation. I take the point that flattery will get me nowhere with you so I will desist :).

    “It’s not a matter of “how can they tolerate it” – that’s a question implying the assumption they can DO something about all that.”

    Of course, this is the problem. But imagining they can’t do anything is really, really depressing. Personally I started blogging. I know that doesn’t sound like much, but at least it’s a start.

    OK I think it is time to leave this one here.

    I have however two proposals:

    Firstly I would like to lift your last comment straight out, and post it as a main post,with a short intro by me giving background. Then we can start all over again :).

    No seriously I think these are the issues. Not the economic ones, but the political ones, and they have a wider application than just Italy.

    So let me know here if you are agreeable.

    Secondly, I am about to start a cultural ‘sister’ to Fistful called Living in Europe, which will be similar to Living in China etc (www.livinginchina.com) and I would just *love* you to do some posting there. You will see my philosophy isn’t that everyone has to agree, but that multiple perspectives can help us understand a complex reality (vattimo?).

    So please mail me at say:

    edward@livinginchina.com (oops spam!) and we could talk.

    Lastly (I know I said two – but there is always one more). I do hope that whatever you decide you will hang around at Fistful and help us understand better the Italian Job: as you indicate I am sure there is plenty more to come from whence Parmalat emerged.