‘Italexit’ gathers pace as Borghi predicts collapse of eurozone
The chairman of the Italian budget committee is frighteningly blunt. Italy’s bond market will spin out control as soon as the European Central Bank stops buying the country’s sovereign debt. “The bond spreads will widen dramatically. The whole situation is unsustainable without an ECB guarantee and the eurozone will collapse,” said Claudio Borghi.
This is a greater threat to European banks and global finance than the current opera buffa in Turkey. It is drawing closer. The ECB will halve purchases of eurozone bonds to €15bn (£13bn) a month in October, stopping altogether at the end of the year.
There will no longer be a lender-oflast resort behind eurozone states on Jan 1 2019. Any rescue will require the backing of the EU bail-out fund (ESM), under draconian terms, subject to a vote in the Bundestag.
There is no chance that the insurgent Lega-five Star coalition in Rome would accept the scorchedearth demands of the German finance ministry. The Eurosceptic alliance would activate its “minibot” parallel currency and subvert monetary union from within. “The minibot is part of our official programme. We have it if needed,” Borghi told me.
“We’re back where we were when the crisis began in 2011. Instead of fixing the structural flaws in the eurozone system, they used the bond spreads as a weapon of mass financial destruction to topple governments and put their friends in power,” he said.
“There are only two golden keys to get out of this slaughterhouse: either the ECB agrees to hold the risk spread at 150 points; or we take back our own currency and restore national independence,” he said.
Mr Borghi has long been the Eurosceptic firebrand of the nationalist Lega. An ex-deutsche Bank trader, he proposes the restoration of the Medici Florin to be the coin of Italy. What is striking is that Giancarlo Giorgetti has issued equally stark warnings over the last two weeks. He is the Lega’s elder statesman, and de facto co-premier.
“I expect an attack; financial markets are populated by hungry speculative funds that pick their prey and pounce. We saw what happened in August 1992 [ERM crisis], and seven years ago with Berlusconi. In the summer, there is thin trading in financial markets, and it lends itself to assaults on countries. Look at Turkey,” he told Il Libero. “The old establishment in Italy and Europe wants to overthrow this government to avoid a precedent. Populist governments are not tolerated. The EU is afraid that if Italy succeeds, other countries might copy us,” he said. Sound familiar?
Mr Giorgetti is alluding to late 2011 when the ECB withheld purchases of Italian bonds to enforce austerity policies on Silvio Berlusconi, and ultimately to force him out of office when he began to flirt with the lira. Much the same happened in Greece to premier George Papandreou.
The Italian and Greek episodes show how the EU apparatus works through powerful elites in each member state to enforce its will when resisted, and how it uses fear. Economic coercion is an instrument for regime change. In the case of Brexit it is now being used for the reverse purpose, to prop up the capitulard regime of Theresa May.
Lorenzo Codogno from LC Macro Advisors said Lega rhetoric has become alarming. He had a ringside seat in 2011 as chief economist at the Italian treasury, and saw how quickly the debt markets can turn against you.
The risk spread on Italian 10-year bonds has risen almost 50 basis points to 290 over the last four trading sessions, whether caused by fears over Unicredit’s exposure to Turkey or – more important – fears over a budget clash between the Lega-grillini coalition and Brussels this autumn.
Mr Codogno said the usually cautious Lega statesman seemed to be opening the door to “Italexit”. “Italians may get distracted at the beach, but financial markets will notice. Italy is very vulnerable right now if there is any slowdown in the global economy. If the government pushes the budget deficit above 3pc of GDP there will be a crisis immediately,” he said.
Italy is not a basket case. It still has the EU’S second biggest manufacturing industry and a current account surplus of 2.8pc of GDP. It is a net contributor to Brussels. Italians have greater private wealth than the Germans. Aggregate debt as a share of GDP is at low end of the G7. That is why the EU is courting fate if it pushes Rome too far.
The country faces insolvency risk only because the EMU has no lender of last resort and creates a deflationary trap for states that entered monetary union with high public debt. This has entrenched a vicious circle of low investment and dismal productivity.
Until the mid-1990s, Italian growth tracked German levels, with a ritual of benign devaluations. Italy’s two lost decades began when the currencies were fixed. The consequence is that Italy’s debt dynamics are acutely sensitive to slight changes in nominal GDP growth. Public debt has only just stabilised at 132pc of GDP a full decade into this ageing cycle. One more shock will push it through 140pc. The compound arithmetic will turn fatal.
Foreign hedge funds already have their fingers on the trigger. Brussels wants further fiscal austerity of 1pc of GDP over the next year. The Legagrillini promised voters fiscal expansion of 6pc of GDP, if you add up the flat tax, universal basic income, reversal of pension reforms, and the cancellation of planned VAT rises.
Finance minister Giovanni Tria sounds conciliatory. The next budget will be “compatible” with EU rules. But he is a fig-leaf figure foisted upon the coalition after the country’s president vetoed a Eurosceptic.
Above all, power lies with Matteo Salvini, the Lega strongman. He has seized on the Genoa bridge disaster to denounce austerity and EU budget limits. It is the tragic excuse he needs to outflank the pro-eu poteri forti in Italy. The fate of the eurozone now depends on a trial of strength between the Brussels-frankfurt-berlin axis and a ferociously defiant Salvini.
There is no use threatening to eject the country from monetary union. That would precipitate sovereign and corporate defaults, and bring down the European banking system. Germany could expect to lose €2 trillion. Besides, it is what Salvini wants. He concluded long ago that national self-government is impossible as long as Italy remains in the EU cage. Or as he once told me, “the euro is a crime against humanity”.
The eurozone has just two or three months to figure out how to handle the most dangerous revolt since the launch of monetary union, and what to do when the ECB stops buying Italian bonds. This has the makings of very volatile autumn.