Newsgroup: it.economia.borsa
Titolo: Prodi's lamentable poll is bad news for the euro

Prodi's lamentable poll is bad news for the euro
By Wolfgang Munchau
Published: April 17 2006 03:00 | Last updated: April 17 2006 03:00
The narrow election victory by Romano Prodi's centre-left alliance was the 
worst imaginable outcome in terms of Italy's chances to remain in the 
eurozone beyond 2015. I would expect international investors to start taking 
speculative bets on Italy's euro membership within the lifetime of a Prodi 
government.
These are not bets on Mr Prodi's political commitment to the euro. It would 
be difficult to find a more pro-European politician than the former 
president of the European Commission. These are bets on economic 
circumstances that might force a government to take decisions that are 
unthinkable until the moment they become inevitable.
We all know that Italy's economy is in deep trouble. But it is important to 
remember that Italy's problems are different from those of France and 
Germany. Many continental economies suffer from poor growth and high 
unemployment. Italy suffers from poor growth, too, even though its 
employment creation has been impressive. Italy's problem is lack of 
readiness for life in a monetary union.
Since the euro's launch in 1999, Italy has experienced massive appreciation 
of its real exchange rate. Its unit labour costs have risen by 20 per cent 
relative to Germany's. While German wages react to aggregate demand, Italian 
wages continue to rise at about 3 per cent annually. Italy also has a 
problem with price competitiveness in many economic sectors. A sensible 
economic reform programme should focus on wage bargaining systems and 
product and service market regulation.
Mr Prodi offers the wrong kind of reform programme. It consists of the same 
supply-side reforms that have failed in other European countries. Since his 
rag-bag coalition of moderates, socialists and communists will have a 
wafer-thin majority in the Senate, he may not even be able to deliver on his 
own insufficient programme. If Italy continues to lose macroeconomic 
competitiveness, a populist political movement could well emerge with an 
agenda for euro withdrawal. Let us think the unthinkable and assume some 
future Italian government brings back the lira. What would then happen to 
the country's mostly euro-denominated debt, which now stands at 106.5 per 
cent of gross domestic product? Italy would almost certainly be unable to 
service its obligations to investors in full. It would either convert those 
debts back into lira at an exchange rate unfavourable to investors or it 
would default outright.
From an investor's viewpoint, Italian withdrawal from the eurozone is 
equivalent to sovereign default. Given this outlook, why are financial 
markets not yet speculating on such an event? Last week, yields on Italian 
10-year government bonds traded at only 0.3 percentage points above the 
yields of equivalent German bonds. This rating suggests that the markets do 
not currently see a high risk of default. But surely, even if one thinks 
Italian withdrawal from the eurozone unlikely, the risk is certainly not 
close to zero either.
Three factors may explain the markets' optimism. First is the view that 
Italy may be effectively trapped inside the eurozone; leaving it would not 
solve any economic problems. This argument ignores the fact that default is 
usually not a consequence of rational choice but of panic.
Second is the belief that the European Central Bank would ultimately bail 
out a defaulting member state. This view may underestimate the ECB's resolve 
to observe its no-bail-out rule.
Third, even if one accepts the worst-case scenario, it is still highly 
unlikely that default would occur within the lifetime of a 10-year bond. 
This argument offers the most plausible explanation for why the markets have 
not placed a higher risk premium on Italian bonds. It is also explains why 
bond markets are notoriously poor early indicators of default risk. Bond 
investors are complacent until they start to panic.
After the Italian poll results, will investors remain as optimistic about 
the subsequent 10-year period during the lifetime of a Prodi government? 
There is a reasonable chance that risk premiums will rise over the next five 
years. I would also expect a rise in demand for Italian credit default 
swaps - financial instruments that allow investors to insure against 
default. Last week investors would have paid an annual premium of only 
?21,750 (£15,050) to insure against default on a ?10m investment in a 
10-year Italian government bond. This is very low given the political and 
economic uncertainties.
CDSs are not natural speculative instruments. A buyer of Italian CDSs is 
reimbursed only if Italy defaults. But sophisticated investors know how to 
construct profitable trading strategies from such an unbalanced valuation. 
Financial markets cannot force a country out of a monetary union through 
currency speculation - as they forced Britain out of Europe's exchange rate 
mechanism in 1992. But there are other ways for investors to exploit a 
country's difficulties in a monetary union.
This is why there are parallels between Italy today and the UK in 1992. 
Britain's political commitment to the ERM appeared as unshakable then as Mr 
Prodi's support for the euro looks now. But Britain was neither politically 
nor economically ready to live under a regime of semi-fixed exchange rates. 
Italy's membership of the euro is based on similarly shaky foundations. 
Fourteen years ago, it took investors a few days to expose a political lie.

 Prodi's lamentable poll is bad news for the euro
sto leggendo e non ho finito
conosco piuttosto bene i britannici:
il piede messo ad esempio da
generali mps
in cina li ha infastiditi
ma quello nmesso in india
li ha imbufaliti
 
quella testa di gallina d'un gobbo di fizz
quello a pallaro'
parlava da Londra
e fizz fa killeraggio a comando
da un bel pezzo:
ricordate cosa fece alle banche giapponesi
un due o tre anni fa ?
li mise in watch
siccome davano fastidio coi derivati
avevano anche i libri zozzi
ma l'esecutioner fu fizz
e i giap temettero l'enola gay II
e si adeguarono
fizz e' nessuno
chi conta e'
la lobby delle meretrici infette
che lo manda 
fizz esegue
e pallaro' a me fa senso assaje...

 resolve to observe its no-bail-out rule.
e due oggi
l'altro era il mentecatto del golpe
il pagliaccio che diffama
a FT stan bruciando le chiappe !
proseguo la letttura

 This is why there are parallels between Italy today and the UK in 1992.
questa del 1992 e' ambigua 
ci anche fu il governo Major che batte' i labour per una incollatura
si dimenticano di qualcosa non irrilevante...
sempre continuo

 Prodi's lamentable poll is bad news for the euro
un sacco di bla bla
un sacco di froidiane speranze
gli dan fastidio
generali e mps in india
altro che pippe
mirano a discreditare in quell'ottica
se gli si leva il residuale commonwealth che han su
finiscono a rotoli
loro inmportano le merci da dieci pi
da anni ed anni
come ora noi si importan gli stracci cinesi
loro han distrutto la loro industria tessile
ma si son ripagati con la finanza
e ora vedono l'italia portare le banche verso l'asia
e gli rode il culo
altro che palle