[Editor’s Note: The following post is by TDV Italy correspondent Alexander Jousse]
Once again Italy will take center stage in the global financial crisis, and the architect of Italy's impending disaster is once again former Prime Minister, Silvio Berlusconi. Not only is he trying to trigger another crisis in order to keep power, he is responsible for a lot of Italy's current problems. During the first few years of his premiership, he had plenty of opportunity to reverse Italy’s course by cutting government spending and reforming labor laws; instead he decided to push the pedal to the metal and increase spending and make laws to benefit himself and his friends. In this way he was a lot like that paragon of virtue and responsibility, George W. Bush; he talks about free markets and liberty, but had a very different agenda.
After twenty years of legal battles, his enemies have finally managed to get Berlusconi convicted of fraud, related to tax evasion. Due to Italian law, he is too old to go to jail, so he has an option of house arrest or community service. Whatever he decides we can be guaranteed it will turn into a media spectacle. Currently there is a large scandal brewing. It turns out that one of the judges that convicted Berlusconi based judgment on his own personal opinion, not evidence (isn't that always the case with public courts?).
This would not be such a problem except that the current government is a Berlusconi coalition; there is a large probability that the coalition will collapse or that Berlusconi will try to use the chaos to force a new election. If there is a new election, Berlusconi thinks that he could regain control of both legislative houses. Once he has control of both assemblies, it would theoretically be possible to change the judicial laws that got him convicted (government law is always subject to change). In Italy there is no legal concept of double jeopardy and a person can be tried multiple times for the same crime, even after acquittal. If the magistrates have a personal vendetta against someone, they can keep the legal process going long enough to get the results that they want. This has happened to Berlusconi, designers Domenico Dolce and Stefano Gabbana, and the American exchange student Amanda Knox.
A new election would come at a critical time for Italy. Due to excessive taxes, corruption, government spending and red tape, Italy is experiencing something that could only be described as a depression. Now, there is no more money. What money there is circulates slowly. Companies rarely get paid. When they do it can take years. To make matters worse, they often have to pay taxes on money that they have not received. In some cases companies are desperately trying to get loans in order to pay extortion (taxes). The banks have cut most short term lending and what loans they do hold are non-performing.
I have several friends who work in Italy as freelancers and they are constantly having problems with salaries. In some cases they have waited six months before receiving their first paycheck. Many people will continue working, even if they do not get paid, because a job that does not pay is better than no job!
The last time my wife and I walked around our village we found four villas for sale in a single street! This is due to the new property tax called IMU. Since its introduction the property market has been flooded with houses. Most of these houses will never get sold, as there are few who can afford them, or those who can don't need more houses.
The debt to GDP ratio is now at 132%. Government debt increased by over 100 billion euros during the last year! The reality is that Italy has already defaulted. The state has at least 130 billion euros of unpaid bills owed to small and medium sized companies. In true Enron accounting style, this debt is not on the balance sheets. In many cases businessmen or families have resorted to suicide, and sadly it does not help. In the worst cases, the parasitic political class have gate crashed their funerals!
In the mainstream media, there has been a lot of talk about austerity and fiscal discipline, but that is absolute bullshit. In true Keynesian style, austerity means increasing taxes, borrowing for stimulus spending, while not paying bills. Most of the new taxes are direct taxes on industry, trade and transport; the taxes on fuel have pushed the price of petrol to around the 10$-a-gallon mark. The taxes on electricity, gas, transport and property have taken what little money was available for food. ISTAT, the state statistics agency, say that a third of Italian households can no longer afford to eat meat.
In my first article for TDV, I predicted that Mario Monti would want to target the black market and stop tax evasion. He and the current premier have been fairly successful in targeting a lot of the less politically connected businessmen. It is fairly common practice for the Italian Army (Guardia di Finanza) to dragnet a popular tourist or commercial area and investigate everyone within the area. The problem is that anyone can be found guilty of tax evasion. No one understands the tax laws, certainly not anyone within the government, let alone businessmen and evading taxes is was the only way to survive.
For instance, under current laws that are being used again, if a person buys an espresso for one euro, walks out of the bar, gets stopped, but does not have the till slip, that is regarded as tax evasion. The bar will be fined and the person could be investigated further, and if the officials are nasty, they can find problems. The rather predictable result of these heavy handed military raids, has been to drive business from popular commercial districts and destroy jobs. This is gradually destroying the traditional, organic and voluntary social safety net known as the 'Black Market' (aka. the free market). In the past, people who could not find regular jobs sold their services to companies, friends, families and extended social networks on the black market. Both parties benefited from this arrangement, by paying lower prices, getting paid cash in hand, and avoiding the insane Italian labour laws and taxes. Now it has become too risky to work in this manner. The black market still exists, but these transactions are reserved for small irregular jobs and close associates. Another not so unexpected side effect, has been to increase the number of people claiming unemployment insurance from the state. This fund is technically bankrupt!
To add insult to injury, the politically connected class, collectively known as 'La Casta' or 'The Caste', with the definitive article; have never had things so good. They have stolen billions of euros over the years, using political party funding as personal expense accounts and using their influence to direct money to their own personal offshore consulting companies, while providing mysterious services. Very few are prosecuted for these crimes, the few who are, have been rewarded with better paying positions in the Senate; which makes them untouchable. They do not have the common decency to pretend to be shameful, while talking about austerity and sacrifice; which is only a virtue for the ‘hoi polloi’.
The Troika, with its ambiguous guarantees and the LTRO program, Italy with its shadow theater of austerity; were able to push down the yields on government bonds. It saved Italy in the short term, but has created a problem that dwarfs Greece, Portugal, and Cypress combined. Due to non-performing loans and Italian banks unofficial function to support La Casta, they have been using the LTRO funds to buy only Italian Bonds. This has had a devastating effect on the economy, as money no longer circulates, bills do not get paid, companies close because they have no short term credit. What money is left is used to buy only Italian bonds.
The Italian banks are very worried, they are desperately trying to sell these junk bonds. I have an empty bank account in Italy; at least once a month I get emails or phone calls from the bank trying to get me to buy bonds. A friend of mine receives calls from the bank, telling him to urgently sign some documents or risk closure of their account. It is a lie, when they arrive a salesman immediately tries to sell him Italian Bonds. This goes on every month, the banks buy more and more of this shit. Most of the money in Italy is used to prop up the failing system, either through exorbitant taxes, or through bank deposits. Soon these games will destroy the European banking system. (Editor's Note: these kinds of insights and investment/shorting opportunities are regularly featured in The Dollar Vigilante newsletter).
At the current yields Italy pays about 75 billion euros a year in interest, it also needs to roll over existing debt. Soon it will run out of fiat money; all that is needed is another political crisis, to trigger a rise on bond yields. If they further increase taxes, the economy will contract, resulting in increased deficit spending and lower tax revenues. The current crisis that Berlusconi is creating could well be the trigger!
It is highly likely that the government will collapse within a few months (TDV Italy is rushing to start-up in Italian in Italy to help those with assets still escape); the current turmoil with Berlusconi is just the start, the politicians seeing the current weakness are back on the campaign trail. Eventually the coalition will collapse due to internal tensions and betrayal.
Within the near future Italy will require some form of bailout. While bail-in for failing banks is the new official policy, it would be political and economic suicide to force the bail-in of every bank in the country. A bail-in of that magnitude would destroy all of the illusions of social cohesion, integration, law and equality within the European project. Most of the European leaders are vain cowards who want a European legacy. They will talk tough about bail-ins for a few small banks or a widely hated Cypress, but they will balk at making any decision that will destroy the European project.
Here is the crux of the problem: for the EU to survive it has to support Italy, but its support will only come if Italy is able to cut spending and reform. Italy has failed to liberalize (privatize and free) its economy and cut spending and it is highly unlikely that the politicians will ever vote on anything that will diminish their lifestyle. Therefore Italy will be forced to surrender considerable legal, political and financial autonomy as part of the bailout conditions.
For the past few months, the current government has been paying for CIABook advertising, promoting the idea of a federal Europe. They are aware that failure is around the corner and trying to prepare for it. Will Italians accept this? Absolutely. Democracy does not exist in Italy. Most realize that they are slaves to La Casta and would support anyone who breaks the power of this caste.
Italians would be wise to follow the writings of The Dollar Vigilante in English for now and soon in Italian to find out how to escape the coming collapse.
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Alexander Jousse is TDV’s Italy correspondent and a consultant who has lived and worked in Southern Africa, England, Scotland, and Italy, where he currently resides. He has spent time sailing in the Caribbean; where his first experience of American diplomacy was being boarded by the American coastguard off the coast of Grenada.
