Italy in the post-Berlusconi years: A tidal wave of Italian debt will be flooding the markets in 2012

Today, the Dutch newspaper Het Financieele Dagblad writes a must-read article on Italy in the post-Berlusconi (?) year 2012. Here is an extensive, translated summary of this article.

Tidal debt wave is approaching Italy (link in Dutch)

Damocles’ sword. This is how the state debt of Italy is called that must be rolled-over next year. In 2012, almost €300 bln of Italian sovereign bonds needs to be rolled-over to new investors. The total debt of Italy is €1900 bln, which is 120% of GDP.

At Banca d’Italia, the Italian central bank, a spokesman is reacting annoyed when asked whether this isn’t a problem for Italy. ‘We are only technicians. We are only performers of the national policy’, the spokesman stated. ‘Whether that is executed good or bad, you need to ask at the Finance Ministry’.

The Italian Finance Ministry is clearly trivializing the problem. ‘The 2012 amount doesn’t differ so much from the amount we had to pay this year’.

The latter is true. Still, many investors are very much worried about the creditworthiness of Italy. Because, if the current trend is persisting, the Italian interest will rise above 7%. A level where Greece, Portugal and Ireland needed to ask for emergency aid. This is also known as an unsustainable situation. The new president of the Central Bank Ignazio Visco stated exactly for this reason that things all weren’t so bad and that Italy could meet its obligations, even at an interest rate of 8%. However, he did emphasize the necessity of quick economic reforms at Italian politics.

This month, the Italians are looking for investors willing to invest €30 bln in Italian sovereigns. In December, this will be €20 bln. And especially February is tense, with €53 bln. ‘This is going to be a very critical month’, according to bond market specialist Chiara Manenti of Italy’s largest bank Intesa Sanpaolo.’We can only hope that the time that we have left, will bring back some ease at the markets. That things do change’.

According to Manenti, the Italian Finance Ministry will try to issue as little new bonds as possible. ‘They understand that this is hard, due to the situation at the markets’. Manenti thinks that Italy can limit their issuance of new bonds, due to their strict budgeting and austerity measures. For the time being, however, there is about €140 bln of long-term bonds that need to be rolled-over between February – April, 2012.

Traditionally, the main investors in Italian debt are the Italians themselves. They purchase 14%. And to keep these loyal fans enthusiastic in these trying times, the Italian banks consider marketing stunts. As big investors in Italian debt, they have a lot to lose. A ‘Bond Day’ will be organized wherein Italian debt can be purchased without bank provision. This private initiative was applauded and supported by the Italian banks.

There is plenty of money to solve the problems, according to the private organizer of Bond Day. ‘We don’t need Europe. We are obliged to do it ourselves. We created this debt on our own. We moonlighted so much (working without paying taxes), took trains and busses without paying and thought that somebody else would solve our problems. And now we are stuck with this mess’.

The private person in the last paragraph is probably right; as a consequence of organized crime, corruption and massive tax evasion, there is an enormous black money market in Italy. But I very much doubt if this black money will be mobilized to get Italy out of trouble.

Black money; if it can’t be laundered, it wants to remain black. The last thing that organized crime (Mafia, ‘Ndrangheta and Camorra), corrupt officials and tax evaders want is giving the authorities a money trail to follow. Therefore this private initiative is probably doomed.

And for everybody that thought that the disappearance of Silvio Berlusconi would lead to a new renaissance for the Italian economy: it probably won’t.

Berlusconi leaves, but the debt stays. And €300 bln is an enormous amount of debt to roll-over in a financial market that trusts nothing and nobody.

But the million dollar question is what the ECB will do? Will Italian president Mario Draghi save the day and will he be the lender of last and only resort? Or will he stay loyal to the targets of the ECB and fight inflation instead?!

In every case, Draghi is stuck between ‘a rock and a hard place’. If he doesn’t save the Italians in order to keep inflation under control, he might jeopardize the Euro. But if he does help the Italians, this might lead to a Quantitative Easing program that makes Ben Bernanke green of jealousy. What a choice this is!