CONFERINȚA "Viitorul pieței de capital românești" - Ediția a VI-a
BURSA 05.07.2017

CĂLIN RECHEA (translated by Cosmin Ghidoveanu)
 
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     The Italian Chamber of Deputies recently organized the conference called "Italy's public debt in the Eurozone", which saw experts in the restructuring of public debt, academics, journalists and investment fund managers.
     In a participant's opinion, Jens Nordvig, head of department at Nomura Securities and former banker at Goldman Sachs, "Italy is now the most important country in Europe".
     The reason is of course, not just the size of its economy, but also the very high level of its public debt, which nobody seems to be able to find a solution for.
     The latest official data, of April 2017, shows that public debt has reached 2.27 trillion Euros, a new record, after increasing 37.2 billion over last year's similar period.
     The aggregated budget deficit after the first six months of 2017 was 50.2 billion Euros, 22.5 billion Euros higher YOY, according to Reuters, as over half of the deficit of June 2017, of 8.2 billion Euros, was the "result" of the state's involvement in the liquidation of the two banks in the Veneto region.
     A new record, once again a negative one, was seen when it comes to Italy's position within Target2 (Trans-European Automated Real-time Gross settlement Express Transfer), the real-time settlement system for payments in Euros.
     ECB data of May 2017, shows that Italy's deficit within the Target2 system has reached 421.6 billion Euros, way above the level recorded during the sovereign debt crisis, a phenomenon which reflects the acceleration of capital outflows.
     Under these circumstances, it is not surprising that the European authorities have "allowed" Italy to violate the banking resolution regulations that recently came into effect, even though that represents a new factor "to divide Europe", according to Reuters.
     German MEP Sven Giegold described the manner of the liquidation of the two banks, Banca Popolare di Vicenza and Veneto Banca, as "an outrageous skirting of the rules", which will have "negative consequences for the credibility of the banking union". But how much do rules matter, when the survival of irresponsible politicians is at stake?
     The two Italian banks "succeeded" in bringing dark clouds even over the European Central Bank, which "monitored them and declared them solvent up until recently", according to the Reuters article. In other words not even in the "temple" of Frankfurt there are anymore "wizards" that would "read" the crystal globe.
     But what if the "solution" for Italy's public debt will come naturally, once the stage where politicians will be unable to do anything to stop the march of reality? The participants in the conference debated the advantages and disadvantages of the various possible solutions, and the list also included the partial erasing of the debt, the introduction of a currency circulating in parallel with the Euro, and even the exit from the monetary union.
     Jochen Andritzky, member of the German Council of Economic Experts, said that "Italy was too big to be saved", amid the presentation of a study with the title "A mechanism to regulate the restructuring of sovereign debts in the Eurozone".
     The solution of the partial erasing of the debt was backed by Jens Nordvig, one of his arguments being that only 7% of the government bonds in circulation have been issued under a foreign jurisdiction.
     In a presentation of Astellon Capital Partners, suggestively titled "Ciao a tutti" and dedicated to the "orderly restructuring of Italy's debts", it is stated that the country has been going through a sovereign debt crisis for 30 years, as the public debt to GDP ratio has increased over 11% between 1995 and 2015, exclusively as a result of borrowing costs and despite the existence of a primary tax surplus recently.
     In other words, Italy has been one of the most fiscally responsible countries in the Eurozone in the last 20 years, but its previously accrued debts were too big and are no longer sustainable?
     The Astellon Capital analysts also estimate that between 2014 and 2019, the European Central Bank will be responsible for the full financing of Italy's budget deficit, if the current level of net bonds issue and of the quantitative easing program remain unchanged.
     A simple extension of the maturity of the debt would not be a sustainable solution, as a reduction of the coupon of the government bonds would also be necessary. The analysts of Astellon Capital think that "cutting the coupon is the quickest and most realistic path to sustainability".
     In this context, no one should be surprised by a recent statement of the governor of the Bank of Italy, Ignazio Visco, according to whom "Italy will collapse without the Eurozone".
     Is that really the case? Brigitte Granville, an economics professor at the School of Business Management of Queen Mary University of London, presented in the conference the results of a simulation of Italy leaving the Eurozone, which shows that "the return to the national currency is a necessary, but not sufficient requirement for economic turnaround", and "the short term costs of the exiting from the Eurozone can be managed, as the benefits over a five year time frame will be substantial".
     Even though he wasn't among the participants in the conference organized by the Italian Parliament, Patrick Artus, chief-economist of investment bank Natixis, supports the idea of restructuring Italy's debt, because "Italy's structural problems have not been corrected during the quantitative easing period".
     Artus's analysis includes France in the same category. "As the quantitative easing program of the ECB cannot be maintained forever, that means that France's and Italy's structural problems will not be fixable when quantitative easing stops and long term interest rates grow again", the French economist also wrote, questioning the effectiveness of quantitative easing when it comes to stimulating structural reforms.
     What will be left if the quantitative easing of the ECB, namely the promise of prosperity through money printing doesn't yield the desired results? Only the most explosive of the solutions analyzed during the conference organized by the Chamber of Deputies of Italy: the erasing of the public debt amid the exit from the Eurozone and the return to the national currency.
     It is all just a matter of time, which is no longer measured in decades, but in years. 
 

 
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