Yet complications remain part of the mix. Berlusconi and the Northern League, a key party in his center-right coalition, want early elections instead of allowing a technocrat to lead the country. So does another center-left party, Italy of Values. Italian politicians are reluctant to be associated with the unpopular austerity measures that could reduce both their power and re-electability. Thus, whether or not the push to get Monte to the top of the transitional government succeeds remains to be seen, but the odds are in his favor: elections could take weeks and the ongoing instability would undoubtedly wreak more havoc with worldwide markets. Havoc that would undoubtedly send bond yields soaring once again.
Despite being a victim of so-called market forces, Berlusconi has no one but himself to blame for his ouster. He’s been elected three times, each time on claims he would reform Italy’s government. Yet Italy’s pension system consumes 40 percent of income tax revenue to care for Europe’s oldest population. The country is hampered by high wage costs coupled with low productivity, bloated government payrolls, a sclerotic bureaucracy, sky-high taxes and a dismal educational system producing one of the lowest levels of college graduates among first world nations. It’s manufacturing base has been usurped by Asians since the 1990s. All of the dysfunction was papered over by the formation of the EU and tsunami of cheap money that kept the system from collapsing.
Until now. Italy’s debt currently stands at 120 percent of GDP, second only to Greece’s unconscionable 162 percent albatross. And despite the lower interest rate on one-year bills, yields on five- and ten-year securities remain dangerously close to seven percent, due to a clash between France and Germany over a permanent EU rescue fund, and the ECB’s statement that its current market intervention is a temporary one. Adding to gloom is a statement by Barclay’s Capitol that Italy’s debt has reached a level that is “clearly unsustainable” and that the “EFSF [European Financial Stability Facility] is not an adequate safety net to insulate countries like Italy from contagion.”
The last bit is hardly surprising. Italy’s current debt of $2.6 trillion is more than that of the EU’s other troubled nations, namely Portugal, Ireland, Greece and Spain combined. Moreover, $272 billion in bond debt matures in 2012, along with another $147 billion in bills. The country’s first bond redemption comes on February 1st, when Italy must pay back $35.4 billion for debt sold 10 years ago.
Thus, Greece and Italy become the latest victims of European cradle-to-grave socialist excess, best expressed by Margaret Thatcher’s immortal bromide that such a system inevitably fails when one runs out of “other people’s money to spend.” As of now the transitional governments in both countries, even under the most optimum circumstances, seem to be nothing more than another attempt to kick the fiscal can–and the seemingly inevitable demise of the European Union–down the road one more time.
For those wondering which financial institutions are exposed to what, Barclays has come up with this handy chart showing European bank exposure to Italian debt. But the chart only tells half the story. While France has the most exposure and the U.S. comes in fifth, former IMF official Desmond Lachman illuminates the perils of international banking. “We may not have much direct exposure to the periphery, but we’ve got exposure to bets in Europe that have exposure to the periphery,” he explains. “And that means we’ve got exposure.” In layman’s terms it comes down to this: French banks have the greatest exposure to Greek debt, American and British banks to French debt–and American banks to British debt.
And who is most exposed to the debt of American banks? Perhaps the Obama administration might want to consider issuing “TARP 2″ t-shirts to every American taxpayer. People on the hook for saving the entire world from the wretched excesses of socialism and the futility of Keynesian economic bailouts deserve something for their trouble.
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