Italian collapse rapidly approaching?

Italian voters have long been fed up with their corrupt parties pigging-out on public money; in 1993 a referendum motion to end party funding was passed, only to have been completely ignored by the politicians. Recent events prompted the shaky Italian Cabinet (desperate for some populist legitimacy if lacking any such democratic authority) - to propose an actual phasing-out of funding by 2017, starting with a reduction in this July's instalment. Unsurprisingly, yesterday only Beppe Grillo's 5-Star party and Bossi's Lega Nord voted for the measure - it was defeated by all the other parties voting together. It won't, however, last for long. 

Anyone following Hatfield Girl's painful accounts of the failure of the Italian economy - and the virtual bread rationing was for me one of the most telling indicators - will realise that the crisis is deep and real. A recent piece from the LSE puts the contraction as worse on just about every measure than the 1929 - 1934 collapse, and predicts 'The collapse of the Italian state finances is rapidly approaching. It will have an enormous impact on the Eurozone and the European Union'. Ambrose in the Telegraph has been saying so now for months.

Even my nephew, a studious mediaevalist spending the Summer in Chiantishire with no desire to notice anything after the fourteenth century, has been unable to neglect the malfeasances of bankers, panderers, frauds and politicians in Italian life today for those confined to the bolgia. (in translation only for me, but my valued 1976 edition with the translation by Dorothy L Sayers remains the best)

Timing-wise, an Italian collapse around October would suit me, with the € back to 1.25 or so.

The Pain to come in Spain

City-types may wish to download Oliver Wyman's report on Spanish bank debt from HERE; released yesterday, that underpinned the estimate of €60bn for Spanish bank recapitalisation. Behind the figures are a sea of human misery to come. Some 42% of the bailout total - some €25bn - relates to projected defaults and foreclosures on retail mortgages, with 86% of this relating to '1st residences' - people's homes. A further 7% relates to second homes, but under the Spanish system in which all the assets of a defaulting borrower are liable, rather than just the subject of the loan as in the UK, it means up to 93% of struggling borrowers could lose their homes by 2014. Potential defaults are estimated from 7% (base case) to 15% (adverse case) of existing mortgage-holders. With around 2.5m retail mortgages in Spain, hundreds of thousands could lose their homes. 

As predicted, the LTV figures on the banks' books are a crock. Or as Oliver Wyman puts it rather more diplomatically, "potentially latent risks not recognized in the banks’ balance sheets, such as outdated house price valuations that are not correctly reflecting present property values". Overall the banks are admitting 62% LTV, which Oliver Wyman thinks should be between 85% (base case) to 99% (adverse case) at 2012 - 2014 OMV. Lenders in Spain are limited to lending a maximum of 80% of a property's value - if OMV drops below this, borrowers are liable for the shortfall, and all of their assets are included in the liability.

However, some economists think even the awful figures revealed in the report don't reflect the true scale of the problem. The NYT published a piece on the 24th, four days before the report's release, the predictions of which are not inconsistent with the official report, but with a harsh conclusion;

Borja Mateo, author of a recent book on the Spanish real estate market, said there were now 1.9 million housing units for sale in Spain and about 3.9 million that could go on to the market in the coming years. With current housing demand now at about 175,000 units a year, Mr. Mateo predicted the glut would cause home prices eventually to fall by 60 percent (OW predicts -30% between 2011 - 2014 - ed). Because the typical Spaniard has 80 percent of his or her assets tied up in real estate, a plunge in prices of this magnitude would be devastating. “What we are seeing,” he said, “is a massive impoverishment of a country.”

 And the impact on troubled Catalunya? Not good:

Passionate Ambrose

The Editor of the Telegraph has been singularly indulgent, I think, in publishing Ambrose Evan-Pritchard's latest comment on the Spanish crisis. Ambrose is clearly as infatuated with The Lady as a teen, and his piece is from the heart, and in no way bad for that. I can't claim to be immune to the same mooncalf attraction myself.

The stitch-up he refers to, but neglects to explain, is rather more coolly described in the FT. Or the WSJ

Tomorrow (Friday) Spain is due to reveal the resources needed for the new 'bad bank' / 'cleaning up the other banks' deal, following today's radical but positive budgetary measures. The markets, I assume, will wait until then to react.

Waiting for the Euro

Clegg's daft 'soak the rich' soundbite can be considered as much a part of the silly season as the Clacton lion; the number of taxpayers in a narrow band between the 'squeezed middle' and those wealthy enough to leave UK tax jurisdiction if overtaxed is small. Yet this captive group - tied to their firms or employers, earning say over £100k - are to be token rich victims as the cuts start to bite next year among the poorest deciles. It's politics; it ain't economics.

Similarly all the calls for massive infrastructure funding. Such schemes take years to develop, and over the next two or three the only people who will benefit are architects, planners and consultants. Meanwhile business is sitting on a massive cash-pile they're either too nervous to invest or are keeping to compete in the inevitable shake-up of mergers, acquisitions and battlefield salvage from any Euro collapse.

Keynesian demand-stimulus - dropping fivers out of a helicopter - isn't the way either, not at this time. And don't forget hysteresis, that efficiency-gains implemented by firms in recession mean that if and when production returns to 2007 output levels it will do so at lower input factor costs. Except of course for the public sector, so resilient to shedding labour costs in recession that few efficiencies are ever gained from the economic cycle. 

What I'm convinced is lacking is not will, or capacity, or ability or too few poorer people. It's knowledge of the road ahead. Uncertainty is the greatest risk, and inhibits business and investment decisions more than anything else. And the greatest element of that uncertainty is the future of the Eurozone.

Towards the waveform collapse

28th May - "Last week Madrid unveiled its latest plan to tackle problems in its banking system, announcing it would make an emergency €19bn injection into Bankia." 

10th June - "The only thing that is absolutely certain is that Mr Rajoy's acceptance of a €100bn (£80bn) credit line marks a new phase in the euro crisis."

19th June - "European leaders are poised to announce a €600 billion deal to bail out Spain and Italy, it emerged at the G20 summit on Tuesday night."

1st July - "EU leaders admit they don't have €3,000 bn this time" ???

Going ...... Going ......

Even six months ago the news that 10 year Italian bonds had risen above 6% would have dominated the news - never mind Spain's going over 7%, which is the national finance equivalent of being 200m away from the lip of Niagara falls in a small barrel. Even France is knocking 3%, about double the German rate, with questions as to whether further rating downgrades will push Marianne into the red zone.

Farage's latest dose of home truths (bottom) couldn't be more appropriate.

 

UK's €1 trillion cash hoard - where?

Following from the post below, the last study I can find on the extent of cash hoarding by UK firms is from the Centre for European Reform, back in March, quoted in the WSJ. The CER is fairly pro-EU, but not uncritical. UK firms are holding an extraordinary €1 tn in cash, whilst the Eurozone nations' firms are holding €2 tn between them.

One can only sincerely hope that they're keeping the €1tn cash in bonds, gilts, the Post Office Savings Bank or under the MD's mattress - anywhere, in fact, but on deposit with the Zombie banks.

Unravelling already

Barely had the conference call ended that secured Spain a €100bn lifeline than the deal started to unravel. Imagine a waveform oscillating at first gently with low amplitude and frequency; the bail out sums are relatively modest, and the effects last for months. As time goes on the amplitude and frequency increase to the point where hundreds of billions are moving to secure effects that last for days only. This is the end phase, just before the waveform collapses in chaos. 

So far the game is playing out with just the financial sector and governments as actors; so far the big industrials and corporates have been pretty quiet. Whereas the UK has only 4 non-finance firms in the global top 100 (BP, Tesco, Vodafone ...) Germany has at least 8 (Volkswagon, Daimler, E.ON, Siemens, BASF, Deutche Telekom, BMW, Deutche Post ..) and many of these have been hoarding cash. I have a hunch that there's a point at which these will come into play - but not to save the banks.

It's all moving very rapidly now.

Markets won't wait

So, Europe's banks still have no access to money because they won't lend to one another. They won't lend to one another because the risk of unquantified, hidden liabilities is unknown. Unquantified, hidden liabilities include a share of the world's $500 trillion in the Russian-doll's nest of derivatives that fuelled the boom. In addition, the Open Market Value of the property against which Spanish banks have secured their loans is about half the value the banks are using. Best estimates of the UK banks' share of the residue of worthless derivatives, once all the trades have been collapsed back, is about $10 trillion. As the Mail reports today, the aggregate value of all the privately owned residential property in the UK is only $8.6 trillion; in other words, if every single penny of our own equity in our homes were assigned to the banks, they would still all be bust. 

The reaction of European governments has not been to let the banks fall, but to convert bank debt to public debt, by socialising the banks' losses. Except that many governments, being completely broke, need to borrow the money to buy the banks' debts and the markets will only lend to them at prohibitive rates of interest. In the Eurozone, the answer being proposed is to pool all government debt, allowing Germany to strengthen the weak periphery - but this requires fiscal union, which needs, erm, political union.

The timescale for this is away in 2013 and 2014 at the earliest. The timescale for a government-forced split for UK banks between retail banking and casino recklessness is even further - 2017. This is all fantasy; the markets simply won't wait. Soros gives it three months, I give it until August. However, we can get through this - if we're ruthless. We need a Bill ready to go, to pass all its stages in 24 hours, to split the banks immediately, with a mandatory penalty of whole-life imprisonment upon conviction for any banker who attempts to subvert funds away from the retail bank sector. Let the casino arms fail, and take their $10 tn of worthless derivatives with them.  

Planning for the collapse of the Euro

The weekend papers carried such a number of articles on a single subject - how the UK is contingency-planning for the collapse of the Euro - that one suspects this was no journalistic coincidence but the result of a quiet piece of Treasury spin. If so, one wonders who it was aimed at - those European Finance Ministries who refuse to recognise the possibility of Euro-collapse, the financial markets, UK business and industry or you and I. But clearly the break up of the Euro is no longer 'unthinkable' in government circles, though it's taken a year of bloggers and commentators united views on the inevitable collapse of the currency to get there. And whichever way you look at it, it will cost the UK something. 


It's the tendency of governments and more importantly of the mandarinate to pursue an economic creed long after its sell-by date that's interesting. Kinnock - in the sole achievement of a lifetime in politics - convinced his party to drop Clause Four on the basis that economic power was no longer about ownership, but about regulation. Only to see the most spectacular failures of regulation in the newly privatised / de-monopolised transport, energy, telecoms, financial and technology sectors. Gordon Brown even took the idea to the point that the nation no longer needed to own Gold, on the basis that it could regulate instead. Don't get me wrong - I never want to see the return of a State telephone service that rations copper lines, and the GDP boost we've enjoyed from the privatisation / liberalisation process has been important - but the wave of popular benefits doesn't include better pension provision or a lower national debt. 


Now of course there's not much left to privatise except one huge gleaming asset - the road network. London's already demonstrated that road pricing can be lucrative; a capital investment of £160m produces a net annual profit of £90m (excluding the massive capital premium a private firm would pay for say a 25 year right to charge). Private Toll roads have a long history in the UK, being nationalised only in 1888. Perhaps it's time to flog off the Motorways? 

The political class and corporate class are one

On a day when no one is arguing seriously against the condemnation by the High Pay Commission of the naked corporate greed by the parasitic bloodsuckers who siphon the profits from your savings and pensions to fund their lavish lifestyles, only the Guardian seems to have got it right on the Spanish election. And the preceding paragraph doesn't make me some sort of Trot - I'm still the One-Nation Conservative I always have been. But the biggest threat to my core ideologies, to Adam Smith, laissez-faire capitalism and a Burkean Britain, comes not from the left but from an unholy Statist alliance between the political class and the corporate class. 


And they will fall together. The scrawls of 'Vote Here' on the ATM machines in Spain, and the almost universal cries of 'they don't represent us' and 'they're all the same' are not manifestations of anarcho-trotskyist protest but of the Wisdom of Crowds. 

The Winter of the World

Half the population of Egypt is under 24, and half the population of Syria under 21. Half of the population of Gaza are under 17, and of Yemen 16. In other circumstances, this 'bulge' of a prime working-age cohort entering the labour market would presage economic boom, but outside of the BRIC nations if economies are stagnant and opportunities limited what it produces is a lot of angry young men and a market for assault rifles. Back in February, when the shoots of Spring were stirring, I wrote

What they have in common in their demands is not ideological; this isn't a war of competing ideas. What they want is a bigger say in their nation's conduct, an end to nepotism and corruption and a fairer go at prosperity. Much like our own young people, really. They want the rewards of a globalisation process that depends on the expansion of a global middle-class for economic growth; jobs and salaries, secure homes and consumer goods. The great sadness, and the great threat, is that they've probably missed the boat.

The twenty-first century will be utterly different from the post-war bureaucratic age we've known in the West; what it will bring we simply don't know - there are just too many variables, one can't model chaos. We can be sure that we can't stand immune from the tectonic shifts now in motion, and with no assurance that the tensions now manifest in the Mahgreb won't play themselves out here in the UK. All of which makes it even more urgent that we deal once and for all with the corruption of the political class, the denial of popular democracy by a repressive European Union and its domestic dags, and the growth of a fair and equitable society free of Socialist inequalities, distortions and jobbery.

Of the three objectives I stated for our own polity, the corruption of the political class is as entrenched as ever, with them now proposing to establish themselves as State parties at the taxpayer's expense, the EU is more repressive than ever, rolling nascent democracy into the dirt, and the unfair and unequal grip of Socialist ideology on our nation and society remains untouched. We face entering the Winter of the World with all the evils of Statism still in place, and unless we deal with them, we'll regret it eternally.

Why Vickers must happen now

Just occasionally the toxic liabilities hidden by common consent in the depths of the UK banks surface. I'm talking about the $10 trillion of worthless derivatives, of course. As UK banks' direct exposure to Greece was discussed, there didn't seem to be a problem; direct loans of some £1.6bn were outstanding, and at risk. Pfft. Our banks are big enough to swallow that. Then came the 'but' - in addition there were worthless derivatives of some $60bn linked to Greek activities, which a Greek bank failure would expose. Ah, that's different, then. 


Until we insulate the working economy from these liabilities, until the Vickers reforms are implemented, we will all be held liable for these toxic assets. 2019 is far too far away. We need separation by the end of 2012 at the very latest. As the Euro zone disintegrates, as surely it will, so will European banks start to fall and like a Fred West Open Day, the bodies in the cellar will start to surface. The buccaneer banks with their toxic derivatives must be allowed to collapse and go if trade, manufacturing and the real economy, all of which are robust, are to survive. 

Either the Hun shits gold or France is next

Maybe Spain, maybe France. But until the constipated Hun shits out gold, the Euro-rot won't stop.

Time to lynch the clown

Italy has something of a history of being led by posturing clowns, or at least by corrupt and evil men who hid their vice under a mask of clownish buffoonery. Yes, the priapic Berlusconi was such a one, as was the absurd Mussolini, but also Andreotti, a Mafia stooge convicted of murdering a journalist and Craxi, mired in graft and corruption, within the recent past. Some had a jackdaw-like compulsion for geegaws, like Francesco Cossiga, who scrounged sovereign orders from just about every State on Earth, including our own Bath, to the point where his entire torso from neck to groin was not big enough to wear them all. None have failed to provide the average Englishman with an innate sense of moral superiority and greater worth.


Hatfield Girl has remarked that the wealth ghettos are intact; the streets are filled with gleaming new cars, the women are beautiful in their Autumn fashion, the restaurants are full, the sparkling shop windows bursting with actinic lamp glare and expensive goods. In fact just as I report the state of the City here - just the same. In fact what we're both seeing is the financial crisis itself, in which financial sector profits have been privatised but losses nationalised. We're looking at the privatised gains and not the socialised pains. 


No doubt Berlusconi will manage to avoid jail, like Andreotti before him. Perhaps he is already suffering from Saunders' Syndrome, an Alzheimer's-like condition brought on by judicial proceedings. Italians haven't used the Gadaffi  solution since Benito and Clara were hung upside-down like rabbits in the game larder. 

There's only one story today

It won't last until a Greek referendum in January. There's doubt it will last until the end of the month. The Euro-stitch up is coming unravelled faster than a cheap sweater from Asda. China has snubbed invitations to buy up Euro debt, and even the US is rattled. Yet Greece comes somewhere in the global GDP league between Denmark and Columbia - hardly a major league player. 


The demise of the Euro was inevitable. The only question was when. It seems it might be 'now'. 

One Nation

The times are certainly a-changing, perhaps more rapidly than at any time I can recall. Take the rewards of the most senior figures in our society, the Supreme Court judges, Generals, university Vice Chancellors. They can expect a working life in which the 'relativities' are maintained with a chauffeured car and a domestic servant as part of the job and in retirement no-one is much surprised to find them in a spoof-Lutyens house in Hampshire of the kind that requires a ride-on lawnmower. Fair enough. Yet these people were the 'Establishment', the privileged elite, the ruling class, against whom we protested in the 1970s through music and satire. Now their rewards - and status - are as nothing compared to those that head and manage the transnational corporates; they are as far below an investment banker in income terms as an unemployed teen is below a GP. 


And this is what's happened since the 1970s; a new class of the global super-rich has grown almost without notice, and with them a top-tier of earners in the City and global finance, and the CEOs, skimming the cream off the assets they manage for anyone in a pension fund or with investments. The fact that it's not their money that enables some 140 corporates to control 60% of invested wealth is an irrelevance - it's the fact that global corporates act solely for their own ends that matters. The nurses and teachers whose pension funds they manage (rapaciously) don't share in any increased quality of life, don't even get a sniff of the wealth and privilege that those who invest 20% of their earnings enjoy. 


As Mary Riddell comments in the Telegraph, for the first time both main parties have picked up the zeitgeist.  There is a national recognition that these rewards are too great, the differentials too wide, that these folk have piled wealth upon wealth for themselves just because they can. Though the MSM tags the 'occupy' protests as anti-capitalist they're not; they're anti-corporatist. And if they're against globalisation they're not protectionist; they oppose the way in which international capital can dodge and evade national regulation, not the idea of 'a fair go' for any nation in the global marketplace. Above all they're a reminder that 'One Nation' finds a deep resonance in the English soul.  

Corporatism is the enemy of Capitalism

H/T Greg Tingey
Greg has pointed us to the New Scientist, which reports the findings of a team of Swiss scientists who have turned their analytic skills to the ownership of business enterprises. The full piece is well worth a read, but the headline findings are that;

• 1,318 of some 43,060 global corporates (3%) directly generate 20% of global operating revenue, and between them own firms that generate 60% of global revenue
• 147 'super corporates' control 40% of the wealth of the network

Now of course without reading the primary research paper and finding the definitions used for 'wealth' and 'network' and so on in accounting terms we can only be fairly sure that the research shows that a small number of global corporates with complex links control a large part of the world's economy. In recent weeks I've offered arguments that support the contention that the corporates are the enemy of capitalism, of laissez-faire capitalism, because of the use of their power to restrict and control competition  I've also offered arguments that the corporates are beyond the actions of any single government, making a nonsense not just of national tax and regulatory regimes but of the G8 itself.


Importantly, I've also stated that this isn't some engineered global conspiracy by a shadowy group wanting to take over the world. That's the stuff of kids' comics, not rational debate. The economic power of the super corporates has arisen because it's what they do; mergers, acquisitions, takeovers, horizontal and vertical integration and maximising profit in a world marketplace have grown the super corporates as inevitably as soil, water and sunlight will grow green plants. The problem is, however benign their origin, they exercise tremendous power over our lives outside of any democratic control; we are all disenfranchised by their scale and reach. There's not even a formal framework for dialogue between our elected governments and the dominant corporates. I've no idea what the answer to any of this is - except that occupying St Pauls' is fairly pointless - but the picture is becoming clearer.


The top ten super-corporates named in the study are:- 


1. Barclays plc
2. Capital Group Companies Inc
3. FMR Corporation
4. AXA
5. State Street Corporation
6. JP Morgan Chase & Co
7. Legal & General Group plc
8. Vanguard Group Inc
9. UBS AG
10. Merrill Lynch & Co Inc

Guardian claims the 99% as its own

It was inevitable, I suppose, that the Guardian should claim the 99% as its own, despite its fat-cat public sector readership and bloated staff making up a goodly number of the 1% in the UK. Thus "The fight against global climate change is down to us - the 99%" thus neatly ignoring the gratuitous and obscene profits made by the green energy wing of the 1% as a sort of global climatic con trick. "Occupy protests are reclaiming the psychic space" claims Nina Power, in an article based on the premise that the 1% have established a mind-control system which the tinfoil hats of the protesters have foiled (pardon the pun). A millionaire columnist (no, no, not Lady Toynbee - her piece of guff will come tomorrow) even declares "I'm part of the 1% but I support the 99%", a sentiment with which many of the papers' readers will agree. 


Of course 'we're the 99%' now has the same sort of cachet as declaring 'I'm Spartacus'. The 'Mail' will doubtless run a piece under the strap "Squeezed Surrey homeowners against HS2 are the 99%", the Glasgow Herald will declare "Scots 99% bear the brunt of cuts" and ASDA will launch a TV ad campaign under the slogan "The 99% shop with us". Tee shirt factories in guangdong are no doubt going flat-out producing derivatives of the slogan in more or less meaningful English; "Fish Glass 99%" perhaps or "99% Rap Queen Bus". Cautious statisticians will declare "We're the 95%, + or - 4%". 


That's the thing about a good slogan. It can mean anything to anyone. 

Indignant or Occupy?

In Brazil, Russia, India and China it will be a normal Saturday for the educated young aspirational middle classes; they will browse the global chain stores, take a coffee in a global coffee shop and return to their apartment with some token of global brand identity; a bottle of Johnny Walker, perhaps, or something from Agnès B. Over the weekend, before they return to their careers in aerospace, electronics, marketing or energy they may well tune their satellite TVs to news broadcasts of their old-West counterparts out on the streets today. The Indignant movement started in Spain, a protest by the educated young that the middle class lifestyle had evaded them. No Vuitton belt or bottle of Jim Beam in Seville. The Occupy movement started in New York, a protest by Americans who claim 'we are the 99%' and that the 1% have deprived them of an aspirational middle class lifestyle. No cabin in the Hamptons for those stuck in Alphabet City. 


"International capital is mobile, and is running circles around the world's governments, frankly" speaks an economist on Radio 4's Today as I type. The author of 'The Price of Civilisation', Jeffrey Sachs, appeals for the return of a humanistic and communitarian ethos in America. The blurb for the book includes

Sachs goes deeper than an economic diagnosis. By taking a broad, holistic approach—looking at domestic politics, geopolitics, social psychology, and the natural environment as well—Sachs reveals the larger fissures underlying our country’s current crisis. He shows how Washington has consistently failed to address America’s economic needs. He describes a political system that has lost its ethical moorings, in which ever-rising campaign contributions and lobbying outlays overpower the voice of the citizenry. He also looks at the crisis in our culture, in which an overstimulated and consumption-driven populace in a ferocious quest for wealth now suffers shortfalls of social trust, honesty, and compassion.

This is, of course, true. And the Occupy protesters and the Indignant protesters on the streets today are essentially angry about the same thing. The balance of global power has slipped away from the political class and towards the global corporates, not in some sinister conspiracy but through the wholly natural behaviour of monopolies and oligopolies in excluding competition and strengthening their grip. We, the West, are spent-out; the corporates have squeezed about all they can from our markets. The burgeoning markets and debt-potential of the BRICs are now their focus, rich honeypots of spectacular GDP growth and rapidly expanding middle classes, young populations and a sort of societal energy that powers rapid change. 


Corporatism and the power of Leviathan States and Super States are the enemies both of laissez-faire capitalism and classic Liberalism, but the targets identified by the protesters are as fatuous as these things usually are; "... the WTO, the IMF, the ECB, the UN, the G8, the banks". The fault, dear Brutus, lies not in our stars but in our selves. Both strands of protest today are by essentially 'an overstimulated and consumption-driven populace in a ferocious quest for wealth', by a furious young fighting for material gain. In 1968 they fought for Love; in 2011 it's for Money. 


Update
=======
"You are right to be indignant. The fact is, the system is not working right ... We've socialized losses and privatized gains. That's not capitalism. That's not a market economy." – Joseph Stiglitz, Nobel laureate in economics, speaking to Occupy Wall Street.