The pop­ulist Five Star Move­ment rises on Italy’s moun­tain of debt

▶▶“We can’t keep pay­ing such high in­ter­est just be­cause no­body both­ered to rene­go­ti­ate the debt”

Bloomberg Businessweek (North America) - - CONTENTS - Alessan­dra Migliaccio and Lorenzo To­taro

The Rome Olympics of 1960 marked the re­bound of the Ital­ian cap­i­tal af­ter years of war and re­con­struc­tion, an af­fir­ma­tion of the coun­try’s re­nais­sance and the city’s emer­gence as a sym­bol of dolce vita in­sou­ciance. Rome is still pay­ing the bill, and the new mayor, Vir­ginia Raggi, is sick of it.

The city has roughly €13.6 bil­lion ($15.2 bil­lion) in debt and more than 12,000 cred­i­tors—though the pile is so com­plex no one re­ally knows how much is owed to whom. Rome faces out­stand­ing bills for op­er­at­ing its 61-year-old metro sys­tem, haul­ing trash, and run­ning a net­work of un­prof­itable phar­ma­cies that com­pete with pri­vate shops. The courts are grap­pling with hun­dreds of law­suits over un­paid debts go­ing back 50 years for land ex­pro­pri­ated to build hos­pi­tals, streets, and other city projects—in­clud­ing some debts con­nected to the 1960 games, for­mer Mayor Ig­nazio Marino has said. The av­er­age in­ter­est rate: 5 per­cent, at a time when the Ital­ian gov­ern­ment is is­su­ing 10-year bonds at 1.5 per­cent an­nu­ally. “We can’t keep pay­ing such high in­ter­est just be­cause no­body both­ered to rene­go­ti­ate the debt,” Raggi, who was elected on June 19, told the

RAI tele­vi­sion net­work.

Raggi, a 37-year-old lawyer and Rome’s first fe­male mayor, has rid­den a wave of frus­tra­tion with Italy’s old guard—es­pe­cially its han­dling of the econ­omy—to one of the coun­try’s most pow­er­ful po­lit­i­cal jobs. Her rise mir­rors the grow­ing strength of her party, the Five Star Move­ment, founded in 2009 by Beppe Grillo, a scruffy, bearded co­me­dian who got his start on va­ri­ety shows in the 1970s but was later banned from public tele­vi­sion for his bit­ing po­lit­i­cal satire. Five Star (the stars are meant to rep­re­sent wa­ter, en­vi­ron­ment, trans­port, de­vel­op­ment, and en­ergy, though the party mostly fo­cuses on fight­ing cor­rup­tion and cut­ting reg­u­la­tions) has grown into a for­mi­da­ble ri­val to the Demo­cratic Party of Prime Min­is­ter Mat­teo Renzi. Its big­gest names—

Grillo, Raggi, and Chiara Ap­pendino, a 32-year-old busi­ness­woman just elected mayor of Turin— have won sup­port from across the po­lit­i­cal spec­trum with their por­trayal of the es­tab­lish­ment as greedy buf­foons un­pre­pared to deal with the coun­try’s prob­lems. Renzi’s “life of priv­i­lege with public money,” Grillo writes on his blog, “is an in­sult to those who can barely make ends meet.”

Five Star’s lead­ers have used debt as an is­sue that sets their party apart from Renzi’s. The move­ment says banks and spe­cial in­ter­est groups en­cour­aged gov­ern­ments at the na­tional and mu­nic­i­pal lev­els to bor­row be­yond their means. At one point Raggi even hinted some of the debt shouldn’t be paid—echo­ing Grillo’s con­tention that the pile of loans is “im­moral”—but she quickly back­tracked af­ter ri­vals ac­cused her of scar­ing off in­vestors.

Renzi says he doesn’t be­lieve in aus­ter­ity mea­sures that might sti­fle growth but that he’s com­mit­ted to re­duc­ing the

na­tional debt by trim­ming bloated bud­gets. And while he hasn’t said he’ll seek to rene­go­ti­ate the debt, he’s ob­tained a par­tial waiver from Euro­pean Union re­stric­tions on deficit spend­ing to free up money for se­cu­rity, in­fra­struc­ture in­vest­ment, and sup­port for the un­em­ployed. None­the­less, ef­forts to tackle the debt have been hob­bled by lack­lus­ter ex­pan­sion. The gross do­mes­tic prod­uct is fore­cast to grow 1.1 per­cent this year, vs. 1.6 per­cent for the euro area, the Euro­pean Com­mis­sion fore­casts.

Few would ar­gue that Italy doesn’t des­per­ately need a so­lu­tion to its debt woes. The coun­try owes cred­i­tors

€2.2 tril­lion, or more than 130 per­cent of GDP—a ra­tio higher than any EU coun­try’s other than Greece. High taxes aimed at pay­ing down the debt sti­fle growth, which re­duces the gov­ern­ment’s abil­ity to fund new pro­grams. At the same time, Italy’s banks hold more of their coun­try’s sov­er­eign debt than lenders in any other euro area na­tion, and they’re bur­dened with €360 bil­lion in bad loans, more than a quar­ter of the to­tal held by euro area fi­nan­cial in­sti­tu­tions. Gov­ern­ment at­tempts to load these as­sets into a “bad bank” have foundered be­cause of Euro­pean rules against state aid to banks. As a re­sult some in­sti­tu­tions could face in­sol­vency. The non­per­form­ing loans and the level of public debt held by banks make their “over­all po­si­tion very pre­car­i­ous,” says Marc Ost­wald, a strate­gist at ADM In­vestor Ser­vices In­ter­na­tional. The non­per­form­ing loans could dev­as­tate banks’ bal­ance sheets, and the heavy ex­po­sure to gov­ern­ment debt could trig­ger heavy losses.

Be­fore Raggi, a gov­ern­men­tap­pointed com­mis­sioner ran Rome for nine months. Marino, from Renzi’s Demo­cratic Party, had been forced out over a scan­dal that in­cluded al­legedly billing the city for a din­ner with the Viet­namese am­bas­sador that never took place. His down­fall and Renzi’s in­abil­ity to counter Raggi with a con­vinc­ing can­di­date por­tend grow­ing prob­lems for the rul­ing party. A poll re­leased in July by re­searcher Demos found that Five Star would win a ma­jor­ity in Par­lia­ment if elec­tions were held to­day. Renzi’s pop­u­lar­ity will be tested in Oc­to­ber, with a ref­er­en­dum he pro­posed on re­duc­ing the Se­nate’s pow­ers and stream­lin­ing the leg­isla­tive process. If it fails, he’s said he’ll quit, lead­ing to “months of po­lit­i­cal in­sta­bil­ity,” says Giovanni Orsina, a gov­ern­ment pro­fes­sor at Rome’s Luis­sGuido Carli Univer­sity. “That would make Italy a prob­lem for Europe once again.”

The bot­tom line Italy’s debt is spurring in­creas­ing frus­tra­tion among vot­ers, im­per­il­ing Prime Min­is­ter Renzi and ben­e­fit­ing the pop­ulist Five Star party.

Stroz­za­preti Ro­tini




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