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No hint of any real fix in Europe [ClearOnMoney]
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No hint of any real fix in Europe

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Commentary

No hint of any real fix in Europe

10 Nov 2011 by Jim Fickett.

Let it be said that the situation in Italy is all about confidence – there is no immediate cash crunch. So you never know, things could look up. But it is difficult to be hopeful. There is no sign that Italy itself, the ECB, or the EU are about to provide support for investor confidence in any substantial way.

"Italy's senate speeds austerity vote"

That's the headline from Bloomberg. Sounds hopeful, doesn't it? So what kind of bold measures are being considered to reduce Italy's debt?

The measures presented to the Senate last night include a pledge to raise 15 billion euros ($20 billion) from real-estate sales over the next three years, a two-year increase in the retirement age to 67 by 2026, opening up closed professions within 12 months and the gradual reduction in government ownership of local services.

The situation in Italy is, in the abstract, fixable. The budget deficit is about 5% of GDP, or about 4% of the existing debt. Even though the overall debt is very large, the markets might well calm down if the debt were clearly on course to be reduced. Unfortunately, that hardly seems to be the case.

On the negative side:

  • the current deficit is adding 4% to existing debt per year
  • increasing interest costs from the panic in the bond market – €300 billion needs to be rolled over next year; adding, say, 3% to currently paid interest rates adds €9 billion, or about half a percent of the debt

On the positive side

  • €15 billion in asset sales will reduce Italy's €1.9 trillion debt by less than 1%, over three years, so less than 1/3 of 1% of debt reduction per year
  • an increase in the retirement age, from 65 to 67, over a period of 15 years – not only is the change extremely gradual but, since this doesn't affect people already receiving benefits, the budget impact over the next decade is probably negligible

The Financial Times does not give any analysis of the reforms, but appears to agree with my conclusion:

On their own, these reforms will clearly not be sufficient to restore market confidence. For that reason, parliament must swing behind a new government which can push ahead with a reform agenda. …

It is evident that the new government will have a very steep road to climb.

The question is, is the system that kept Berlusconi in place for so long likely to produce a radically different outcome now?

ECB -- it's not just the Germans who oppose money printing

From another Bloomberg article,

“Not much more can be expected from us, it’s up to the governments,” Governing Council member Klaas Knot, who heads the Dutch central bank, told lawmakers in The Hague today. Three other policy makers have also publicly rejected calls for more ECB intervention and two further officials, who spoke on condition of anonymity, said the central bank has no plans to make its purchase program unlimited.

Politicians are on another planet

While the market is demanding a solution within days, politicians are still talking about next summer:

Finance ministers failed to bridge divisions this week over the European Stability Mechanism, lessening the chances of activating its 500 billion-euro ($680 billion) war chest next July, said the people, who declined to be identified because the talks are in progress. Officials had hoped to bring the ESM’s start date forward to mid-2012 from its ultimate deadline of July 2013, the people said.

Germany and the Netherlands are resisting pleas by France, Spain, Portugal and Ireland for the bondholder-loss provisions to be stripped from the ESM treaty, the people said. It’s possible that officials will still beat the July 2013 deadline, the officials said.