Jul 29 2013

Italy on the brink: the hidden story of the 2011 near-collapse and analogies with today

by Fabrizio Goria

The difficult position of Italy in the on going Euro Crisis has already been highlighted in our blog in contrast to the surprisingly limited coverage that the international press has dedicated to the country.  Today, we are glad to host Fabrizio Goria, financial journalist for the online newspaper Linkiesta.it, with a piece on the hidden story of the 2011 near-collapse of the Italian financial system and a political analysis of the current situation. The post was originally published in Italian by Linkiesta, English translation by Roberto Orsi .


Palazzo Koch, Bank of Italy

Palazzo Koch, the headquarters of the Bank of Italy. This institution has been heavily involved in Italian politics since the 1992-1994 financial crisis, expressing key figures such as Carlo Azeglio Ciampi (Prime Minister in 1993-1994 and President of the Republic in 1999-2006), Lamberto Dini (Prime Minister in 1995-1996), and current finance minister Fabrizio Saccomanni.

Italy was in line for something extreme in November 2011: namely, to stop issuing government bonds, to stay out of the bond market during the auctions at the end of that year, and to freeze the stock exchange. All this against the climbing Bund-BTP spread, which was growing continuously as a result of a practically unchallenged loss of international credibility. A decree prepared by Mario Monti’s government together with the Bank of Italy was about to do all that. The revelation, published on July 24 by the director of the Corriere della Sera [one of Italy’s major newspapers], Ferruccio De Bortoli, brings Italy back by two years, in that terrible 2011, which made the world realise how fragile a country can be.

A contingency plan. That was what the government prepared in autumn 2011, and successively updated and refined in the following months. Fortunately, one may say. But the fact that this happened two years ago does not mean that this kind of scenario may not happen again. On the contrary, as De Bortoli has highlighted, everything revolves around a decree which has been kept in the safe, in the hope that “it will stay there forever”. A vain hope?

Something similar is happening right now. After a joint meeting of the Bank of Italy, Consob, Ivass and Covip, namely the highest authorities for the regulation of financial markets in Italy, on July 23rd , a series of precise directives have been issued for banks, investment funds, pension funds and asset management companies, practically all institutional players. Autarky is the path to follow when dealing with rating agencies. Should the situation deteriorate again, it is better to disengage from their assessments and focus on domestic evaluations, and autonomous ones, in the management of portfolio risks. Translation: even in the case of further downgrading by rating agencies, the suggestion is not to get rid of the Italian bonds in their balance sheets, regardless of current practices in financial markets. Such an autarky is as dangerous as it is short-sighted, especially in a country which has been burying its head in the sand, instead of yielding to investors’ demands, namely reforms to improve competitiveness and productivity, and the welfare state structure in order to reboot economic growth, which we may now euphemistically define as anaemic. An autarky which brings us back to the hottest weeks of the Republic of Italy.

In those dark days, with the 10-year Bund-BTP spread close to a historical peak, a unique incident occurred. During an institutional meeting, the then minister of internal affairs Roberto Maroni received a phone call. It was towards the end of October. People attending that meeting, a select group of associates, reported that he turned pale. The call came from José Manuel Barroso, the number one of the European Commission. Barroso was very clear with Maroni: “I don’t want you to take this personally. Neither you nor all other members of the government. But you need to “unplug” Berlusconi.” And in that moment Barroso revealed what the strategy was: a flurry of declarations against the then prime minister. From all fronts, from every European policy maker. The message to be sent was one and one only: Berlusconi is inadequate. He, the “caiman” [sometimes the Italian press refers to Berlusconi as “il caimano”, as in the title of the 2006 Nanni Moretti’s movie on his political vicissitudes], managed to resist only for ten days before surrendering to the inevitable.

The turning point of all this was the G20 in Cannes. In the town on the Côte d’Azur the perfect crime was committed. The day before negotiations started, even Lord Adair Turner, president of the Financial Services Authority (FSA) and the British financial regulator at the time, declared: “For us, Italy is a much bigger problem than Greece. A solution ought to be found quickly in order to avoid the worst”. And that set the mood for the two days meeting in Cannes: the aim was to avoid chaos; to prepare a contingency plan; both for toppling Berlusconi, and for making the country safe. In that occasion, however, the most painful of defeats was realised for Italy. First, there was the grinning between Angela Merkel and Nicholas Sarkozy about the credibility of the government in charge. Then, in the night of November 4th, came the capitulation by the hands of Barroso and Van Rompuy. “Italy has decided spontaneously to ask the IMF to monitor its commitments”, said the former. He was echoed by the latter: “Italy has invited the IMF to monitor every quarter, in collaboration with the finance minister Giulio Tremonti, the implementation of the measures”. All this following Christine Lagarde’s warnings. After all, contacts between the Italian finance minister and the IMF did take place exactly two years ago in July, when the Bund-BTP spread catapulted by hundreds of points in a few days, from 183 on July 1st to 332 on July 18th. The contacts between the ministry of finance, responsible for the public debt, the Bank of Italy and the IMF became intense. And for the first time in several years, as sources from the banking sector tell us, phone calls between the banks and the New York Federal Reserve acquired an every-day frequency. It has been said, although it still remains an unconfirmed rumour in financial circles, that Tremonti even contacted the Paris Club, namely the top experts in debt restructuring, in order to have an authoritative opinion about what to do. Italy was abandoned to its own destiny.

Then Monti arrived. And something, at least on the level of credibility, changed. Supported by Brussels, Washington and Paris, Monti put in motion a reform programme, before he was sucked into the grinder of politics. Once the fear of the spread reaching 500 points was over, everything went back as it was before, and for Monti, the ex-European Commissioner, there was nothing else to do, but to step into the quicksand. Did everything go quiet? Not really.

In today’s Italy there are analogies with that summer two years ago. If we exclude the “bazooka” (only words at the moment, but nevertheless) launched by the ECB a year ago, namely the Outright Monetary Transactions (OMT), we run another daily risk: the collapse of the fragile alliance supporting Enrico Letta. A danger amplified by the possible outcomes of Silvio Berlusconi’s trials, who could be banned from all public offices, thus putting in motion a fatal whirlwind of events for the country. And it is paradoxical that Italy has to be again dependent on Berlusconi’s destiny. Someone could call it karma.


Fabrizio Goria is business and finance correspondent of the Italian online news magazine Linkiesta.

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