Since Matteo Renzi grabbed the Italian premiership in February, Rome has fallen off the radar of most crisis watchers.
Renzi’s promise to institute sweeping reforms to business and labour markets appeared to be more than hot air following the appointment of Pier Carol Padoan as finance minister.
The heavy-hitting former chief economist of the Organisation of Economic Co-operation and Development (OECD) appeared to give the youthful Renzi the intellectual ballast and political clout needed to push through an ambitious agenda.
This narrative was allied to figures showing Italy was already close to achieving a balanced budget and its banks were in better shape than many of France’s famous names.
Maybe it is too soon to judge, but figures showing the country has fallen back into recession will dent the new government’s plans along with its image.
Fathom Consulting, run by former Bank of England economist Danny Gabay, warns that Rome may rank as another of Europe’s Black Swans. It has flirted with disaster before and always pulled back. Without a European Central Bank (ECB) rescue, in the form of large-scale quantitative easing, maybe a full-blown run on its debt is inevitable, possibly next year.
Mario Draghi, the ECB president, is expected to tell his audience today that he is waiting to see how his previous attempts at offering cheap credit are faring before considering QE.
Interest rates will be kept on hold alongside further monetary easing.
The view from Draghi’s Frankfurt base is that Italy is one of Europe’s children and must be parented with an iron rod. Any hand-outs or relaxation in tough fiscal constraints will be spent by Rome on the equivalent of sweets and sugary drinks, is his view. And he is not alone. The Germans, Dutch and Brussels elite think the same way.
What could change their mind is a panic-fuelled run on Italian debt.
Fathom said in a note on Tuesday that the intersection between inflation and growth is the key.
Growth is needed to pay the interest on the debt or the debt grows ever larger. It currently stands at around 130% of GDP. Inflation helps erode the debt while growth helps pay for it. Without growth, the contry needs higher inflation. Except the news on Wednesday that a 0.1% drop in output in the first quarter and 0.2% drop in the second was married to a 0% inflation rate.
“As our final chart shows, even if we assume – somewhat generously – that Italian growth returns eventually to its average rate of 1.5% seen in the 30 years running up to the crisis, it would still require an inflation rate in excess of the 2.0% target just to stabilise Italian debt as a proportion of GDP.
“With no growth, no inflation, and of course no currency of its own, something needs to give and soon if Italy is to continue to finance its vast national debt,” it said.
Renzi has other problems occupying his in-tray. On taking office he said the state and its agencies would pay back €75bn of debt owed to private suppliers by July. Last month, Padoan quietly pushed back the date to the end of this year. Hundreds of Italian companies are reportedly laying off staff to cope with the delayed payments, further hampering the recovery.
It’s a sticky situation and one which Draghi, against his better judgement, maybe be forced help with.
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