Two clowns won, who will laugh? The crisis is not returning and at the same time it is. Britain vs. Greece.
Italian election results are known to all of you. Technocrat Monti leaves and he will most probably be replaced with a coalition hastily cobbled together under the slogan saying: a virtue of necessity. And maybe there will even be early election. Anyway, Italy is finally where it belongs – in the spotlight.
Economically, the third largest member of the euro zone has a high potential to sink both Eurowalls just like stones. It has already had its head in the loop twice when, first in the summer of 2011 and then a year later, the yields on its bonds skyrocketed and the ECB had to intervene in order to calm down the situation by buying bonds, or by a promise to buy them. Although Italy has a primary surplus in the budget, it does little to help, as the debt reaches nearly 130% of GDP, or two trillion euros in absolute terms, (after the U. S. and Japan, the Italian bond market is the largest in the world and the largest in Europe).
What is even worse, Italian economy has been stagnating for the last three decades. The GDP has grown at an average of 0. 79% per year since 1991, which is a lower figure than that in Japan and a negative record for a western economy at the same time. To make matters worse, the population of Italy is one of the oldest in the world, making the demographic pressure on the budget coming a little earlier than in the rest of Europe.
Italy cannot afford the economic cough to get any worse. Therefore, European leaders monitor anxiously what will happen in Italy after the election. Peer Steinbrück, a potential future chancellor of Germany, stated directly that two clowns won. President Napolitano, offended by this, cancelled a meeting with him, but Berlusconi and Grillo raised concerns that Italy will cease to continue with reforms and will rather turn to German wallets for help.
One of the latest moves of the Italian Government was the introduction of the transaction tax that will be effective in Italy already on Friday. Let’s see how the investors will respond. After brief enthusiasm in December, when we saw a reverse of the deposit flow and money started coming to banks in the periphery again, the zeal now quickly cooled down. In January, money again flowed out of the banks.
Those most afraid are Germans. Merkel’s adviser said that the crisis has returned with a vengeance. The Finance Minister, Schauble, said something similar. In his opinion, there is a real threat that the problems in Italy will be contagious to other countries. Quite contrasting statements, compared with reassurances from Barroso, Monti, Draghi, Lagarde, and recently also from Hollande, who did not forget to point out that the crisis is over even when they are ordering hamburgers.
Let the numbers show us the situation rather than politicians’ talks. According to the latest forecasts from the Commission in 2014, six members of the euro zone will have debt above 100% of GDP. Of the seventeen countries only one will have a budget surplus (Estonia) and nine of the seventeen members will violate the 3% deficit rule (remember that this is a violation of the Fiscal compact?).
France also belongs to the sinners. It has already requested a postponement, and the Dutch decided to proceed similarly. They no longer intend to save and the reason is, as always, “exceptional circumstances.” French unemployment rate has reached a record since 1997 in the meantime, making the whole government nervous. The Industry Minister, Arnaud Montebourg, thinks that ECB should solve this by money printing, even despite the fact that ECB has already thrown in one trillion euros to the system over the LTRO loans and bought bonds worth more than 200 billion, which seems too little to him.
Cyprus still ranks as a potential candidate for future assistance. In the election there, the president (from the communist party) was replaced by the conservative party candidate who is in favour of the saviour Europe view. This could be the ultimate break-point on the way to the request for bailout. Cyprus allegedly has enough money only until May . Also, with another candidate for help, there was an exchange of power, but with the effect to the contrary. Slovenian Prime Minister, stepped down due to a tax scandal; he is supposed to be replaced with a coalition not very keen on assistance from Brussels, wishing instead to spend on jobs and growth. Let’s see whether they will have enough capacity to spend from, as after six months of this year a € 2 billion of their debts mature, which is quite a large amount for Slovenia.
Via two bankruptcies, Greece managed to reduce its debt by 62 billion in the year-to-year comparison. Still, its debt has reached almost 160% of GDP and the social situation there continues to deteriorate. Foreign manufacturers will significantly reduce the supply of drugs, because the traffickers are buying these at regulated very low prices and sell them back again abroad with profits, not to mention the fact that health care facilities often did not pay for the drugs at all. People are angry and politicians cannot feel as safe as they once could. For example, the former mayor of the second largest Greek city Thessaloniki was convicted of embezzlement of city’s money and sentenced to life just a few days ago.
Bleak weather is not only in the euro zone; Britain has had its rating downgraded by Moody’s. There is no wonder as their public finances look worse than the Greek ones.
The only hint of positive news came from Ireland. Eligible Liabilities Guarantee Scheme, a special guarantee mechanism introduced in 2008, ends now definitely. Similarly to the fund for deposits protection, the banks there paid some little change and the state guaranteed their obligations in exchange. It was a simple mechanism for transferring the costs of incorrect decisions from the shoulders of bank owners to those of the taxpayers, which cost them 62 billion euros. To recap, Ireland’s population is about 4. 6 million. Unlike Spaniards, the Irish paid the costs of the restructuring of their banking system by themselves via ELGS (like Slovaks and Czechs did at the beginning of the millennium, when it cost them about 10% of GDP), but they are doing everything possible to ensure that this created ultra debt is passed through the ECB, and possibly Eurowall, to the whole Euro zone.
Wishing you a rich week,
(Translated by Jakub Pivoluska)