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The Italian coup d’état; now can you smell the rat?

Author bio: 
Richard Cottrell

There was an election in Spain this weekend which, if there were any sense to recent events in Europe, should not be happening. Right now Spaniards should listening to the newscasts and reading in their papers explaining why the election had been cancelled on the orders of the EU, Goldman Sachs, the European Central Bank, the Bilderberg Club and the Trilateral Commission.

The Spanish economy is truly right up the Orinoco.

On Friday the central bank went to the markets to buy €3.6 billion of ten year money in order to keep the debt servicing carousel on its dizzy whirl. The markets took to the government to the cleaners. The money was lent out at 6.975% . This is a whisker short of the so-called ‘guillotine ceiling’ - 7% - the point where borrowing at such extortionate rates makes no sense at all.

As one commentator after another observes, Spain is bankrupt. Talk of the ‘weak link in the euro chain’ is monstrously undercooked. Spain is to the euro currency what the iceberg was to the Titanic on her maiden voyage.

The financial commentator Michael ‘Mish’ Shedlock has been doing some interesting sums. Here’s what he had to say in his Saturday column, where he ran a health check on the Spanish and Italian economies.

“The point is that if you add together all debts - government debts, corporate debts, financial institution debts, and household debts - Spain is a much more indebted or leveraged country than Italy.”

In a nut shell, Spain has got debt coming out of its ears. Italy on the other hand looks much the fairer bet.

Spanish firms are loaded up with vast quantities of borrowing at highly geared rates, especially in the real estate sector which has effectively gone bust. Spain is littered with the unfinished or unsold buildings of every description; houses, office blocks, apartments, shopping malls and business centers, which are never going to attract a buyer.

This is the story of the Spanish Disease for the past two decades, the relentless mania to churn concrete.

The reason is simple. Unlike Italians, who are highly conservative in this respect, the Spanish gorge on household debt. Much of this has gone into property of course. But the mass hysteria called consumerism is equally as much to blame. The Spanish are passionately addicted to all the fetish objects of the good life. New cars, smart kitchens, seaside second homes, purchasing for its own sake.

Household indebtedness to the banking sector in Spain is now an astonishing Everest-like 82% of GDP. This is entirely unsustainable. The word ‘default’ now appears in high profile. Such monstrously high levels of borrowing cannot be supported by banks that are already seriously exposed to massive amounts of non-performing debt in the commercial sector.

Partially the grotesque distortion between incomes and expenditure arises from the macho culture which is part of the Spanish personality. Italians are fairly high on the macho Richter scale, too. But they tend to run a far tighter purse. And unlike the Spanish, they have an eye for tomorrow when the going is already tough on Italian household budgets.

Indebtedness of households in Italy is almost half that of Spain’s, a mere 45% of GDP.

Spanish banks are built on sand. Basically, this comes down to a mismatch between liquidity and credit risk. Over the years Spanish banks and the extensive system of provincially-based home loan providers sensibly looked to long term mortgage backed securities to underwrite their mortgage loans.

Then they plunged into the real estate mania which began at the end of the 90’s. The wheel fell off when the domestic property and lending boom suddenly burst in 2009. As repayment problems spread across the market, the bankers turned to short term hot money to refinance their fixed long term mortgage and other portfolios. This is the same diseased cycle which eventually caused large British banks to run to the taxpayer.

By now you must be catching my general drift. If any country deserved an unexpected visit from the bailiffs, then it was Spain and not Italy.

Now Italian banking problems are of a different order to Spain’s. Private lending is an exception to the rule and the difficulty with banks in Italy is their general disorganization and huge exposure to global sub-prime risks. What is also really interesting compared to Spain is that the mortgage market in Italy has not in the main got trapped in the re-financing bind which is the sickness at the heart of the Spanish banking structure.

The mortgage risk, where it applies, lies with loans made to the Eastern European market, which have gone seriously sour.

Now, read this. One of the sickest banks in Italy is Intesa Sanpaolo SpA (ISP). The bank is hung out to dry on sub-prime and credit derivative junk. The markets know this, so the shares are hardly worth a dime ( a smidgeon over euro) and sank 44% year on. This looks like a squid bank, all slippery with not much in the way of internal substance.

Is it any co-incidence that the new industry minister in Sgr Professor Monti’s gathering of the illuminati is none other than a certain Corrado Passera, who just happens to be chief executive officer of Banca Intesa Sanpaolo SpA?

This, as they say, is eye rubbing stuff. In April this year the same Sgr. Passera was looking to raise about five billion euros from the market in order to cover obligations and re-upholster the bank’s capital base.

The words ‘conflict of interest’ leap to mind.

The outgoing Italian finance minister, Giulio Tremonti, has been credited with running a fiscally tight ship. He won garlands for sweeping reforms to the ossified Italian taxation system. The new president of the European Central Bank, Mario Draghi, assumed office on 3rd November, just two weeks before the putsch in Rome. Draghi is the ex-president of the Bank of Italy. Did he manage to screw things in Italy to such an extent he was put in charge of the euro?

Folks, this does not add up. Because there is very little real journalism in the mainstream media, the public prints and media channels never follow these leads.

Conclusions.

Spanish unemployment levels have risen to 20.33 per cent, the highest in Europe, or for that matter, the OECD. Unemployment in the 16-24 sector is 32%. Most experts believe that even a sudden –and unlikely – turn around in the economy would do little more than shave away a few percentage points.

Some take comfort from the black economy continuing to generate income. This is like taking a sticking plaster to cancer. The main source of off-radar work is the construction industry and that is on its knees.

Italian unemployment by comparison is broadly stable at 8.3%, although figures are much higher among those in the 16-24 category, at 22%.

Broadly speaking, the Italian private sector is performing well, and equal to or above the general trend in other major European economies. However, to be fair this is no small part due to the relatively lower wages paid by Italian employers.

Spanish government debt is equal to 71% of GDP and this is the one area where she scores over Italy. Public sector debt in Italy is 120%. This is the headline figure that been pushed in the headlines to explain the overthrow of the elected Berlusconi administration and its replacement by a committee of wise men led by a well known Bilderberger and Goldman Sachs advisor, Mario Monti.

Now let’s ask the billion-euro question. From this necessarily brief sketch, which out of Italy and Spain is a greater threat to the euro (or the eurozone in general)? The answer is demonstrably Spain.

The Roman Revolution was hatched at the Bilderberg summit back in June, attended by Mario Monti. This is a Goldman Sachs promoted adventure to refloat Italy’s banks at the expense of the public taxpayer. It has nothing whatsoever to do with any threat that Italy might have posed to the euro zone.

The Spanish are borrowing at unheard of rates. Fiscally, Spain is a disaster. Yet Spaniards went to the polls to elect a new government. The Italians have just seen the effective suspension of their democracy. Parliament, like an assembly of the blind mice, just about voted themselves out of existence with a 552 majority in favour of the usurper. It cannot be said too often. Italy is back in the era of Mussolini.

As for Spain, the real fiscal titanic, the predicted ouster of the socialists and victory for the Bilderberger Mariano Rajoy should set things on a proper course there. Another coup, of a different flavour.

Richard Cottrell