Italy’s economic recovery is not what it seems

Italy’s economic recovery is not what it seems

Ask to Maltaway, Why Malta is a great opportunity for Italian Business and Skilled People as well

Italian Prime Minister Matteo Renzi looks on as he arrives to meet Ireland's Prime Minister Enda Kenny at the Chigi palace in Rome, Italy, July 10, 2015. REUTERS/ Max Rossi©Reuters

Italian prime minister Matteo Renzi

Yoram Gutgeld last week made one of the most astonishing economic statements I have heard in a long time. The adviser to Prime Minister Matteo Renzi said in an interview that Italy’s economy was immune to global developments for the next 12 to 24 months because of the tax cuts and reforms of the present administration.

The idea that a G7 club of rich nations is immune to the global economy is ludicrous. This is the 21st century. Granted, Mr Gutgeld may have spoken as the prime minister’s spin-doctor. That is part of his job. But what worries me is that the Italian government is not ready for when the impact of the slowdown in China and emerging markets hits Europe. Friday’s preliminary figures for eurozone gross domestic product show that the slowdown has started. Italy’s quarter-on-quarter growth rates have been falling: from 0.4 per cent in the first quarter to 0.3 per cent in the second to 0.2 per cent in the third.

Italy’s ability to sustain a healthy rate of growth is critical — for the country’s political stability, for its young people with no hope of finding work, for debt sustainability and in particular for its future in the eurozone. The euro has brought Italy nothing but stagnation. Real GDP is now at the same level as at the start of 2000, a year after the euro was launched. GDP today is 9 per cent below the pre-crisis level in early 2008.

If Italy fails to bounce back strongly from this recession, it is hard to see how it can stay in the eurozone. At some point it might well be in the country’s undisputed economic self-interest to leave and devalue. So when we ask whether the economic recovery is sustainable, we are not having a technical dialogue about economics. We are talking about Italy’s future in Europe.

There are three reasons why I am sceptical. The first is evident in last Friday’s GDP data. Italy is not exceptional.

The second reason is the lack of restructuring of Italian banks. The stock of non-performing loans as a percentage of all loans is about 10 per cent, which is close to the peak level in the current cycle. Many of the small and medium-sized banks are in effect insolvent. The clean-up of the banking system — following the 2008 crisis and the two subsequent recessions — has yet to happen. If it does, it will take place in a much tougher regulatory environment. From next year EU “bail-in” rules take effect. Then the Italian government will no longer simply be able to bail out banks but will have to make bondholders and depositors pay up first. Can we be sure the rotten banks will continue to sustain the recovery in this environment?

My third concern is Mr Renzi’s fiscal policy choices. His priority has been to ensure that these create more winners than losers. This is exactly what Silvio Berlusconi did when prime minister. And it should come as no surprise that Mr Renzi ends up with similar policies. Instead of reforming the public administration or the judiciary, he has opted for a cut in the housing tax. This will win votes but will not deliver the change to the economy. We have been here before.

The danger of this strategy is that it could go horribly wrong if the economic shock is big enough and the banking sector weak enough. On current projections, Italy’s 2016 budget deficit will be 2.2-2.4 per cent, depending on how you account for the cost of addressing the refugee crisis. This includes flexibility clauses that Rome has negotiated with the European Commission to take account of that cost. The original deficit goal would have been 1.4 per cent for 2016, but the EU has allowed more leeway because of economic reforms.

I have no objections to any measure to loosen the grip of austerity. But if the downturn comes along with a banking crisis, the 2.4 per cent could easily turn into 3.4 per cent or 4.4 per cent. At that point all flexibility will come to an abrupt halt. Italy will once again have to tighten policy as the economy slows.

Another non-elected “technical” government might take over. Italy might never choose to leave the eurozone for political reasons. But, if Mr Renzi’s calculations prove wrong, Italy will be at the point where it would be rational to leave for economic reasons.



About debt, sin and moral responsibility

About debt, sin and moral responsibility

FOR anybody trying to figure out why different cultures (Greece and Germany, say) seem to have different attitudes to matters like debt, sin and moral responsibility, it is worth looking at how words, including religious words, are used. But one should always be suspicious of simple answers and be prepared for surprises.

As a philologically-minded colleague points out in this week’s print edition, the history of the words “austere” and “austerity” and their German equivalent is paradoxical. Far from being a fiendish German invention, the word Austerität is a recent and relatively uncommon addition to the German language, borrowed from English, which took it from French, which took it from Latin, which took it from, of all languages, Greek.

Another piece of vocabulary around which big theories have been constructed is the German word Schuld, which means both debt and guilt, including guilt of the very serious kind determined by judges or religious preachers. Can the tough German line over the euro zone crisis be ascribed to this conflation of meanings, or to the idea that debtors are sinners who deserve to be punished? Explorers of this theory have included Yanis Varoufakis, who was Greek finance minister until a few days ago, and Stuart Holland, a British Labour politician. An article by Mr Holland, quoted with approval in a blog by his Hellenic friend, makes the following assertion about Wolfgang Schäuble, the German finance minister, and about German culture.

Herr Schäuble sees the Eurozone crisis as one of public debt. This is not unrelated to the German for debt, Schuld, meaning guilt……[The German philosopher Friedrich] Nietzsche also observed that there was a tendency in Germany among strong creditors to demand penitence from weak debtors for their debt-guilt and to punish them if they did not seek redemption.

If you find this theory at all compelling, you may also find it significant that a key line in the most famous Christian prayer (most familiar in English as “forgive us our trespasses as we forgive those who trespass against us”) can come out in German as “und vergib uns unsere Schuld, wie auch wir vergeben unsern Schuldigern” of which the most literal meaning is “forgive us our debts, as we also forgive those in debt to us…” 

But hold on: that is exactly what the original Greek of the New Testament (recited by Greek school-children every day) says. The prayer clearly asks forgiveness of our debts (ofeilemata) and offers the same to those who are in debt (tois ofeiletais) to us. The German version is simply an accurate rendering of the Greek text; so too is the Italian version, which speaks of debiti and debitori; and many English translations refer to debts and debtors. It is the English word “trespasses” (which in modern language suggests a rather minor infringement of somebody else’s space) that is aberrant.

And the equation of sin and debt crops up in many other places in the New Testament. To explain the meaning of that familiar line in the Lord’s Prayer, Jesus tells the story of a man who ruthlessly demands money from his own debtors, but in turn is treated harshly by an even richer man to whom he owes money. By the same token, he adds, God will not forgive us for the wrongs that we commit unless we forgive others who have wronged us.

So is there, in that case, no ultimate difference between German and Greek attitudes to sin or debt? Or would there be no real difference if both cultures were equally religiously literate and close to their Christian roots?

I believe that a significant difference in basic attitudes does play a role in the euro crisis, and indeed that it can usefully be discussed in theological and linguistic terms. But it is more helpful to look at overtones or shades of meaning rather than the direct literal sense of the terms involved.

There is no doubt that Schuld as guilt can be a big, heavy word for a big, heavy state of affairs, and it is commonly used in that weighty sense. By contrast, the Greek root (ofeil– ) used in the Lord’s Prayer just about exists in ordinary language but it’s rare and a bit clunky. (Ofeileis na to kaneis, you ought to do it…) The word which is both common and resonant ischreos (debt or obligation) and its derivative ypochreosi(s) which also means obligation.

The striking thing about ypochreosis is that it describes a fluid, sometimes emotionally charged and above all personal relationship between two parties, the obligation that A feels to B because of some favour that B has done in the past or perhaps because of a family tie. A financial transaction can also create an ypochreosis but it is always part of the total relationship between the individuals. Renée Hirschon, a social anthropologist, has observedthat if Greeks react a little warily to gifts from acquaintances, it is because they are nervous of the ypochreosis that accepting the present would incur.

To make a vast generalisation, Schuld in the sense of guilt can often imply a broad, objective situation, which holds good, and has serious moral implications, regardless of the conscious feelings of the individuals involved. One person or many can be guilty, schuldig, before God or in the light of some ultimate moral law, regardless of whether they feel that guilt; and if they don’t feel it, they probably should.  Ypochreosis describes a more subjective sense of obligation between two individuals; it may be induced by social or cultural factors, but the individuals concerned do not see it as applying to anybody but themselves.

If you attach importance to Schuld in the sense of guilt you probably also feel strongly that there are rules, norms and laws in whose observance everybody has a stake, and whose infringement cannot be left unpunished without harming society as a whole. On the other hand, if you are more of an ypochreosis type of person, you probably tend to think that the enforcement of norms (and the calling in of debts) is, like just about everything else, a matter of personal discretion between the parties involved. If debts are rigorously called in, it must be because the creditor has “something against” the debtor, rather than because the creditor sees a general, societal interest in rules and contracts being observed.

With due allowance for the danger of all cultural stereotypes, I reckon that this distinction might be of some help in deciphering the euro crisis, or at least the contrasting ways in which people react to it.|newe|20-07-2015|

Is this an help for Greece?

Is this an help for Greece?

I guess much more capital and brains are heading to Malta, just because they learn

Sometime you win…. sometime you learn….but only if you feel pain….otherwise you think to be invincible….. aren’t you ?

S&P: Malta’s exposure to Greece ‘limited’, Economic growth outlook positive

S&P: Malta’s exposure to Greece ‘limited’, Economic growth outlook positive, debt/GDP 55%, real GDP +3,5%

Maltaway is your gateway to access Malta’s stability,banking system, growth and competitiveness….why the gap…

Standard and Poor’s rate Malta’s economic growth outlook ‘positive’, revised upwards from ‘stable’ • Events in Greece unlikely to have a material bearing on Malta’s credit profile

Malta’s economic growth prospects remain strong relative to its EU and ‘BBB’ rating category peers, credit rating agency Standard and Poor’s said last night.

Malta’s budgetary consolidation is expected to continue, leading net general government debt to decline to 55% of GDP in 2018, from 59% in 2014.

S&P is also of the opinion that the ongoing financial crisis in Greece will not have a material bearing on Malta’s credit profile.

“The positive outlook reflects a one-in-three likelihood of an upgrade within the next 24 months if medium-term economic growth prospects are maintained and fiscal consolidation continues, while no bank- or nonfinancial public enterprise-related contingent liabilities or external risks materialize.”

Malta’s real (not nominal) GDP grew by 3.5% in 2014. This is projected to expand by close to 3% annually on average in 2015-2018.

“We believe Malta’s economy will continue to outpace the eurozone as a whole, notably because of investments in the energy sector,” S&P said referring to the interconnector and the Delimara LNG project.

Beyond 2016, further diversification of the economy–particularly into information and communication technology and medical tourism–could boost investment. Domestic demand is expected to be backed by stronger private consumption, resulting from government-mandated cuts to utility tariffs that have reduced electricity prices by 25%.

Lastly, consumption trends are being supported by rising real wages and, more importantly, broader female participation in the labor market.

“On the external side, we view Malta as an open, services-oriented economy. We expect the tourism sector will continue to perform well on the back of a favorable euro/pounds sterling exchange rate, the increased perception of terrorism-related risks in some other Southern Mediterranean countries, and the current turmoil in Greece.”

Malta’s exposure to Greece ‘limited’

“We do not believe events in Greece will have a material bearing on Malta’s credit profile. Like all eurozone members, Malta is exposed through common monetary, fiscal, and development institutions such as the European Central Bank, the European Financial Stability Facility, and the European Investment Bank.

“Apart from contingent liabilities associated with those institutions, Malta’s exposure to Greece is limited. Malta’s trade with Greece is small and direct financial links are few. We assess the external debt of Malta’s domestic banks as sufficiently contained such that Malta would cope with a permanent real increase in external funding costs spilling over to eurozone markets from Greece.”

Financial services

The low corporate tax rate has attracted significant foreign investment into Malta’s banking, insurance, and gaming industries, implying that the economy would be sensitive to potential pressure for a eurozone-wide standardization of corporate tax regimes.

“We expect that Malta will run a small current account surplus over our 2015-2018 forecast horizon, and remain in a narrow net external asset position of about 16% of current account receipts (CARs) on average during 2015-2018.

Offshore banks dominate Malta’s international investment position and it is understood that foreign banks use Malta as a booking center for their own financing needs.

Economic growth

S&P believes that Malta’s favorable economic growth prospects support further

budgetary consolidation. It forecasts general government consolidation to progress gradually through 2018, primarily owing to increased tax receipts from strengthening domestic demand and the expected decline in current expenditure from 2016 onward.

Net general government debt is expected to decrease to 55% of GDP by 2018, from 59% in 2014. General government gross debt forecasted to be 68% of GDP in 2015, excluding the guarantees related to the European Financial Stability.

General government interest payments forecasted tol average 7.1% of general government revenues per year over 2015-2018.


Malta’s contingent fiscal liabilities stemming from NFPEs derive mostly from

Enemalta’s government guaranteed debt (9.7% of GDP as of end-March 2015). Enemalta will likely not generate profits until 2017.

“We note that the current drop in international oil prices is helping Enemalta’s expected return on investments. Nevertheless, other state-owned enterprises also represent fiscal risks, as exemplified by this year’s government financial support to Air Malta, estimated at 0.5% of GDP.”

Government guarantees of NFPE debt totaled 16% of GDP at year-end 2014.

Reforms needed to avoid straining public finances

S&P reports that without further reforms in the pension and health care systems, public finances will become strained in the medium term.

“Under our criteria, we see contingent fiscal risks to public finances coming from the banking sector. Malta’s domestic banking sector operates alongside a large offshore sector which, we believe, the government would not support in case of financial distress.

“However, dislocations in their funding could affect the island’s reputation as a financial center.”

Assets of the total banking sector are nearly 7xGDP while assets of core domestic banks amounted to about 2x GDP. Domestic systemically important banks include 25% state-owned Bank of Valleta (total assets €7.7 billion or about 8% of GDP) and HSBC Malta Bank (total assets €5.15 billion).

To this list, S&P would add fast-growing Mediterranean Bank (total assets €2.2 billion), which the agency expects to join the other two under ECB supervision soon.

Euro area membership

Membership in the eurozone anchors Malta’s monetary policy and provides its banks access to funding at low nominal interest rates. Nevertheless, S&P believes that membership in a monetary union increases the onus on member governments to support competitiveness through fluid labor, product, and services markets, and to build up fiscal buffers against future shocks.

This is more the case now than a year ago, given that the ECB is undershooting its medium-term price stability target of close to, but lower than, 2% for the eurozone as a whole.

“We note that nominal unit labor costs have been increasing at one of the fastest rates in the euro area, posing risks for competitiveness when many euro area neighbors are undertaking structural reforms and internal devaluations.”

Why German bonds could be even riskier than Greece’s

Why German bonds could be even riskier than Greece’s

…. or why bond are much riskier than they are perceived

Which will be the better investment over the next 10 or even 30 years: German bonds or Greek bonds?

If that sounds like a simple question, think again.

In the fallout from Sunday’s “no” vote in Greece, the price of “safe” German bonds has surged and that of “risky” Greek bonds has, predictably, plunged.

Bonds are like seesaws: When the price goes up, the yield goes down and vice-versa.

At today’s prices, a 30-year German Bund sports a yield to maturity of only 1.4%. Meanwhile, a 30-year Greek bond offers a theoretical yield of just under 13% — i.e., nearly 10 times as much.

Naturally the markets are predicting that Greek bondholders won’t get all that money. They’ll take what is generally called a “haircut,” meaning cuts in their coupons and final principal repayment.

But how big will the haircut be?

Unless Greek bondholders suffer a massive, catastrophic write-down, they will actually end up getting more money back on their bonds than German bondholders will. That’s because “risk” and “safety” cannot be understood without reference to the price you pay for an asset. A “solid” asset can end up being a risky or poor investment if you pay too much; a dubious or risky asset, as long as it has at least some value, can end up being a great deal if you get it cheaply enough.

Both could be the case right now. Greek bonds could be underpriced. And German bonds could be overpriced. A yield of 1.4% a year for three decades looks dismal from almost any standpoint.

Mathematically, Greek bondholders will end up ahead if their haircut is less than about 73%. Yes, really. Take a 30-year bond with a theoretical yield of 12.73%, and you have to cut coupons and principal overall by more than 73% before the owner ends up earning a net return of less than 1.4% a year.

The face value of Greece’s government debt is currently 170% of economic output, or gross domestic product. A decrease of 73% would reduce that to only 46% — about the same as that of Germany. That would be some cut.


SUPER COOL!!! Germany will issue 0% bonds? what’s debt? Exactly the same as print money

Germany will issue 0% bonds? what’s debt? Exactly the same as print money

What is “debt”?

Well it’s simply a liability of the state, or a debt owed by the state to the private sector on which interest is normally paid. But then base money is exactly the same thing, i.e. a liability of the state, except that no interest is paid on it.

So the lower the rate of interest on debt, the more do “debt” and base money become the same thing.