Commentary. Everyone should be asking themselves is whether a state like Italy could fail. The answer? In theory, yes, it could.

The power of the markets and the solitude of the state

The Milan stock exchange saw a flurry of activity (it was down 2.65 percent by closing time), and the interest on Italian government bonds has not been as high in five years (2-year BTPs have been most affected, with an interest rate that went from 0.94 percent to 2.55 percent, a 150 percent increase).

Behind the so-called “spread” (the difference in yield between Italian and German government bonds), lies nothing but the price tag of the “Italian risk.”

At this time, many are wondering whether political instability has caused the spread to shoot up, or if this is in fact an external lever of pressure towards facilitating the formation of a new government. The question is pointless, much like asking which came first, the chicken or the egg. Instead, what everyone should be asking themselves is whether a state like Italy could fail. The answer? In theory, yes, it could.

The sell-off these days points to a drop in investor confidence in our country, in particular in its ability to repay its debts (although there is also a lot of trading activity that is purely speculative, in any case).

We are talking about both large and small investors, given that the large volume of sales Tuesday also affected securities with very short maturities (six-month BOTs). The investors are heading for the exits, the value of bonds is falling, and higher and higher interest rates are needed to attract capital. This vicious circle may end up having tragic consequences at certain levels.

One might object that the State is not a private company, and its finances resemble those of a household even less. This is true; however, in our case (as with all the countries of the Eurozone), there is a big “but”: any bailout would depend not on ourselves, but on the European institutions, as the Greek case has demonstrated. And the price tag would inevitably be an arm and a leg.

As a consequence of joining the single currency (although, in fact, the umbilical cord between the Treasury and the Bank of Italy had already been cut at the beginning of the ‘80s), the Eurozone countries do not have the tools to shore up their debt and defend themselves effectively against speculative attacks. Only the ECB could, hopefully, put forward a number of measures (known as “unconventional”) whenever a member State would find itself in a situation of “serious and overt macroeconomic difficulties.”

Among these measures, there is also the possibility of the direct purchase by the ECB of short-term government securities (while “quantitative easing” involves purchases that occur on the secondary market, involving the banks). This is the so-called “OMT program” (meaning “outright monetary transactions”), which Draghi announced in 2012 but has not activated for any country so far. In essence, this is a classic program of financial assistance, conditional on the adoption by the beneficiary country of extraordinary, if not draconian, measures to balance out its public finances. On paper, this is “help for a country in difficulty”; in reality, it means “direct rule by the Troika.”

However, perhaps such speculation is going too far. For now, we should focus on analyzing the current situation, in which the weight of “debt servicing” expenses on the public spending of our country is increasing day by day. This money is taken away from our citizens and ends up in the hands of those who buy our debt (40 percent foreign investors, only 5 percent Italian households and businesses). What kind of numbers are we talking about? An interest rate raised by 100 base points (1 percentage point) means an increase in interest payments of about 7 billion euros per year (in 2017, debt-related expenses were at €68 billion).

Then there is the issue of the banks, the other facet of the current crisis. With approximately €300 billion of government bonds on their balance sheets, they are suffering heavily these days from the effects of the current tensions on the so-called “sovereign debt.” A sharp devaluation of these securities would in fact open up a large hole in their accounts, already heavily burdened by more than €270 billion (not taking into account losses due to devaluation) of non-performing loans. This possibility is one feared by investors, who in Tuesday’s trading session dumped their Italian bank stocks (-6 percent overall, with the Banca Popolare di Milano the worst hit, down by 6.73 percent).

The yellow-green government failed to get off the ground because it supposedly did not offer sufficient guarantees on the maintenance of our country’s European position—or, at least, this was the official reason.

The “Europe problem,“ however, has not gone away. Beside the unsustainability of the current constraints on public finance and the democracy deficit in decision-making, there is also the problem of the impotence (and lack of support) of states in the face of the overwhelming power of the markets and high finance. It is a world out of joint, and this only adds fuel to the populist fire.

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