
Why Italy Could Be the Epicenter of the Next Financial Crisis - jedwhite
https://www.nytimes.com/2018/10/12/business/italy-debt-crisis-eu-brussels.html
======
cm2187
God knows what will happen but there are a lot of small and not so small fires
everywhere:

\- Trade war

\- Chinese growth faltering

\- Chinese debt bubble

\- Brazilian crisis

\- Turkish crisis

\- Italian populism / Italian debt

\- US student loan bubble

\- Real estate market slowing down in the US and the UK

\- Brexit

\- Over leveraged private companies because of the intense private equity deal
making

\- Tech companies reaching market saturation (internet access, smartphone or
pc ownership, social medias, ecommerce), tech industry ceasing to be a high
growth industry

I may forget some. Perhaps the next financial crisis will be the result of a
combination of all of these rather than a single event (like the 2008
financial crisis was the result of a combination of a real estate market
slowdown, a subprime debt bubble, and an over leveraged and complacent banking
system, followed in 2011 by a sovereign debt crisis, of which Italy was
already the most worrying elephant in the room).

~~~
misja111
Those are small fires, but there's a sleeping volcano as well which is fed by
the historically low European interest rate. This is leading to inflated
housing prices, company valuations and increasing private and corporate debts.
The longer the ECB is keeping its interest rate at zero, the larger this
bubble will become.

~~~
kazen44
Also, we have the enourmous astroid coming towards us which is climate change
and the ongoing inaptitude of politicians to actually tackle climate change.

All these problems will be neglible when have done to little to prevent a
global temperature runoff.

~~~
claydavisss
Disagree. Being utterly cynical, climate change represents a huge economic
opportunity. We've already seen the beginning of this as solar and wind
displaces older energy sources, creating new economic opportunities. Likewise
for electric cars, etc etc

Things will still be bleak for various species and the poor...but I expect
climate change will make many immensely wealthy

~~~
diego_moita
There's a classic cartoon about that: [https://starecat.com/content/wp-
content/uploads/planet-got-d...](https://starecat.com/content/wp-
content/uploads/planet-got-destroyed-but-for-a-beautiful-moment-in-time-we-
created-a-lot-of-value-for-shareholders.jpg)

------
revel
What is not discussed in this article is the staggering amount of Italian debt
the German government is exposed to as a legacy from the 2008 financial
crisis. An Italian default would be like an atom bomb going off in European
markets and the ECB no longer has the means to do much to stop it.

Post 2008, the ECB forced a lot of unpopular economic restructuring measures,
but it never forced bondholders to take the large haircuts necessary to allow
the countries to properly delever. Instead the solution was more debt at
favorable rates and forced adoption of contractionary fiscal policy. The
result is that you have countries like Greece and Italy that were crushed
under a wave of austerity and slowly ballooning debt whose economies never
really recovered because of the toxic combination.

Germany was largely acting out of self-interest when it provided the financing
the countries were asking for so now German banks were terribly exposed to all
that debt. The German bailout of European nations moved bank exposure to the
German taxpayer. There's some lingering resentment amongst the German public
about propping up the Greeks, in particular, but they ain't seen nothin' yet!
The next financial crisis doesn't even have to start in Italy in order to
trigger the Italian debt bomb and wreck the European economy. A no-deal Brexit
could do it. A sharp drop in the American economy could do it. All of this is
to say that we've been crossing a shaky rope bridge across two mountains for
quite some time and I'm not sure that we'll get to the other side. Happy
Sunday everyone!

~~~
atq2119
> and the ECB no longer has the means to do much to stop it

This is incorrect. The ECB is the emitter of Euros. They run the whole system,
so they always have the option to buy government bonds, for example.

Now, whether the _politics_ will allow that to happen is not necessarily
obvious. But that's a separate question, let's not get confused about that.

~~~
JumpCrisscross
> _they always have the option to buy government bonds_

The ECB is uniquely restricted, compared with other central banks, by
"Maastricht treaty provisions that prohibit the ECB from financing member
states" [1]. (These limits are "in terms of proportion of overall public debt
(33 per cent) and of each country’s specific debt issue (33 per cent).")

[1]
[https://www.ft.com/content/8c3ea45c-acd5-11e7-beba-5521c713a...](https://www.ft.com/content/8c3ea45c-acd5-11e7-beba-5521c713abf4)

~~~
repolfx
The EU institutions invariably ignore treaties the moment they become
problematic to the further progress of the EU project. It doesn't matter what
the Maastrict treaty says - if the political will is there to print euros to
bail out Italy it will happen, if there isn't, it won't.

Consider what happened last time the treaties forbade bailouts:

[https://www.reuters.com/article/us-france-lagarde-
idUSTRE6BH...](https://www.reuters.com/article/us-france-lagarde-
idUSTRE6BH0V020101218)

 _“We violated all the rules because we wanted to close ranks and really
rescue the euro zone,” Lagarde was quoted as saying._

 _“The Treaty of Lisbon was very straight-forward. No bailout.”_

 _The summit approved a two-sentence amendment to the treaty at Germany’s
behest to permit the creation of a European Stability Mechanism to handle
financial crises from 2013._

~~~
JumpCrisscross
Amending a treaty isn’t the same as ignoring it.

~~~
repolfx
Clearly the French FinMin (Lagarde) didn't agree with you. But if the 'rules'
a group of people agree to are such that they are thrown out the minute they
become inconvenient, then the entire concept of a treaty or written law itself
becomes irrelevant.

------
Nasrudith
> “We care about markets,” Mr. Di Maio said in a television interview last
> week. But faced with a choice between bond yields and the Italian people, he
> added, “I choose the Italian people.”

That demagogic rhetoric comes up commonly and it makes the same fundamental
mistake or perhaps not wanting to understand that serving your creditors
serves you as long as you need credit. The consequence for defaulting is not
getting any more loans. Setting up an unsustainable system is setting up for a
nasty fall.

Reminds me of some claiming that Greece being able to print the drachma would
give them an easy out to their crisis. Even if they did it just plain wouldn't
work last I heard Greece was still very dependent on imports for things like
pharmaceuticals. Hyper-inflating their own currency relative to growth would
not be a solution - it does nothing for the cost of imports which they depend
upon and is worse than disease it is meant to cure. Less extreme inflation
relative to economic growth could boost relative competitiveness of labor
costs is their own slight advantage but even that would call for a decline in
standard of living as a corollary.

Which brings to mind a thing about loans in general and fiscal wisdom - one
should take out a loan only if it is an investment in some way - either
generating more money or reducing long-term expenses in some way. It may in
fact go bust but it has actual potential to pay for itself. The same seems
like it would apply to countries and investments can also include some
humanitarian purposes - a healthy and well educated workforce can generate
more and is a case of everyone wins.

~~~
Al-Khwarizmi
The rethoric you cite is indeed somewhat demagogic, but the idea that "the
consequence for defaulting is not getting any more loans" is disingenous.

Most countries in the world have had sovereign defaults, often several times
throughout their history. See, for example, the map at [https://katapult-
magazin.de/en/artikel/artikel/fulltext/ston...](https://katapult-
magazin.de/en/artikel/artikel/fulltext/stony-broke-over-and-over/)

Spain defaulted 9 times, Portugal and Greece 6 times, Germany 5 times, the UK
4 times. They still get loans now.

~~~
gebruikersnaam
> Spain defaulted 9 times

This was all before 1900 though, things have changed quite a bit since then.

~~~
ItsMe000001
They have? Details, sure, like structure of debt and who the creditors are
(things like the IMF didn't exist previously), but countries still default.

[https://www.rstreet.org/2016/02/22/countries-dont-go-
bankrup...](https://www.rstreet.org/2016/02/22/countries-dont-go-bankrupt-
the-20th-century-proves-otherwise/)

[https://en.wikipedia.org/wiki/List_of_sovereign_debt_crises](https://en.wikipedia.org/wiki/List_of_sovereign_debt_crises)

[https://www.bankofcanada.ca/wp-
content/uploads/2016/06/r101-...](https://www.bankofcanada.ca/wp-
content/uploads/2016/06/r101-revised-june2017.pdf)

In any case, defaulting on debt is completely natural. It is what's part of
how the system is supposed to work. If lenders didn't pay attention, out of
lack of knowledge or willfully, and the debtor cannot repay, that's it. There
has been a very successful campaign that strengthened the side of the lenders,
big and small, over many decades - not necessarily consciously and
deliberately (not a concerted effort). It's been successfully made into a
moral issue.

------
riffraff
> The proposed budget has exposed the seams in Italy’s governing coalition,
> where one party favors small-business-friendly tax cuts and the other
> enormously expensive welfare programs.

this has not really happened, the choice by the government has been: "let's do
both tax cuts and expand welfare, finance it with debt, growth in the next few
years will fix everything".

This is the worrisome bit, not that there is any widening seam in the
government; the governing coalition is granitic until now, even in the face of
things that the electoral body thought would never be compatibile.

------
alanfranzoni
I think that what the last financial crisis shown us is that "too big too
fail" is the way to go. If you're big enough, you'll be saved and forgiven,
because your fall could create too many problems.

This government, with all its shortcomings, is the first in some decades that
tries to put italian people first, rather than finance, the euro, or banks.

That said, the bet is risky. Salvini started his activities by showing how the
EU is inept at solving the issue with immigrants from Africa and Middle East
(eu countries could not agree on an eu-wide solution, leaving border states to
deal with it).

Now the government wants to transfer that ineptitude feeling to the economy.

Is Italy actually too big to fail? We'll see.

Disclaimer: I'm italian.

~~~
siscia
> This government, with all its shortcomings, is the first in some decades
> that tries to put italian people first, rather than finance, the euro, or
> banks.

Sorry, but this is just false.

In which way they are trying to put the italian people first? The abolition of
Fornero (pension reform) will not solve any issue but will only cause more
problem down the road, similarly for the re-branding of the "unemployment
benefits" into "citizenship income".

I am afraid that Italy is both too big to fail but also too big to be saved.

~~~
alanfranzoni
> In which way they are trying to put the italian people first?

I'm not saying they are succeeding. I'm saying they're trying.

> The abolition of Fornero (pension reform) will not solve any issue but will
> only cause more problem down the road

It will solve the problem for people who are, right now, too old to stay at
work. At least they're not saving pointless banks, aren't they? But, sure, it
could be even worse for young people.

> re-branding of the "unemployment benefits" into "citizenship income".

Universal Basic Income is deemed necessary even by people like Elon Musk, do
you know that? Sure, citizenship income won't work the same way. It's quite
small in comparison with UBW.

What I agree is that, probably, Italy, like other countries, would need
totally different and more drastic measures. It's hard to change things in a
country where retired people earn large sums of money that they don't deserve
(because they haven't saved for that).

But, I don't trust the markets, the finance sector or the economic system to
change that; those "tools" are used by people who just want to extract the
maximum rent, and they'll always use them to achieve that: extract the maximum
rent. Unless we start aiming at a different target, which could be "a fair
distribution of basic wealth and income", we won't reach a different outcome.

All of that, IMHO.

~~~
toyg
I agree on some things the current bunch of muppets is doing (as opposed to
the previous bunch of muppets, I am not partisan), but some of the arguments
put forward are very dangerous.

 _> At least they're not saving pointless banks_

That would be the same pointless banks who allow people to take out pointless
mortgages to live in pointless houses, or to finance pointless businesses who
pay pointless salaries.

I did not like the way the world got out of the 2008 crisis (I would have
nationalised the shit out of the EU/US banking sector, it was a golden
opportunity to make history), but letting huge banks fail would have been
world-ending.

 _> Universal Basic Income is deemed necessary [...] citizenship income won't
work the same way_

Then why do you mention it to justify a Blair-style "workfare" law that has
nothing to do with UBI (for one thing, it won't be _universal_ , which is
kinda the point)? Beyond the propaganda, there will be no UBI - it's just a
reshaping of unemployment benefits to make certain areas of the country
electorally beholden to a certain party, like it happened in the "good old
days".

Quoting a holy text, "you were supposed to bring balance to the Force, not
leave it in darkness".

 _> I don't trust the markets, the finance sector or the economic system to
change that_

On that I agree, but the realities of the XXI century are that the system is
bigger than any single country, and solutions must be co-operative or won't
be. I trust demagogues even less than bankers.

~~~
patrickg_zill
There were plenty of banks that were solvent and solid.

But the politically connected big banks were not. They could have been
reorganized but they were not. In fact not even 1 of the senior management
were punished.

------
0xferruccio
I’m a 21 year old italian from Milan studying my last year of engineering and
can’t see a future for myself in this country.

As soon as I finish my degree I’ll move somewhere else, most of my friends
(that attend the best universities in the country) want to do the same. The
only reason most of us stayed here for uni are the incredibly high quality
universities that are super cheap.

Here are some of the problems we face in my point of view:
[https://ferrucc.io/italy-s-problems/](https://ferrucc.io/italy-s-problems/)

~~~
ksec
>The pension system is a Ponzi Scheme

I am now starting to discover not only pension, but lots and lots of financial
systems and scheme, are not sustainable. Including what ever currency system
we have in place.

~~~
beerlord
The money we spend on the elderly is absolutely unsustainable - welfare and
healthcare.

The taxes in Europe are insane - huge social security taxes (before you even
get your paycheque) and sales taxes.

Yes, healthcare and education is paid for. But if you are middle-class, the
extra taxes you will pay in Europe will far outweigh the gains your receive
from that (compared to America - where you pay less in taxes, but have to pay
for your own college education and healthcare).

Its unsurprising that Europeans have such low birthrates. The cost of living
is mostly the same as the US, but the salaries are much lower/taxes are much
higher.

This whole system needs to be unwound, and more money put into the hands of
workers. If it means people no longer get a state pension, then so be it.

------
timwaagh
I dont think the EU will want to sanction Italy over a budget that is, all
things considered, within the usual 3% deficit limit. They are already in
enough trouble picking more important fights with Poland and Hungary who have
downgraded their democracies.

------
mexicanandre
Having spent the last two months the in Italy it’s really sad to see what it
is like. Some parts are beautiful but other parts are filthy and feel
thirdworld like. I don’t understand how the worlds 10th largest economy is so
dirty in such a poor state

~~~
cedivad
10th largest? Last I checked we were the 7th and that was just a few years
back. Go back another couple of decades and for a brief moment we held 4th
place just after Germany. I believe this decline explains most of what you are
seeing.

~~~
danmaz74
Let's not forget that the 5th place we briefly held was financed by the
enormous unproductive deficit spending which is the root cause of our last 20
years of almost-no-growth. That was just growth on drugs, spending the future
earnings of young and not-yet-born Italians to satisfy the greediness of
voters at that time.

~~~
RobertoG
"[..] spending the future earnings of young and not-yet-born Italians to
satisfy the greediness of voters at that time."

If the Italy of the year 3000 is a wasteland without buildings or industries,
never mind how much money have you saved, the not-yet-born Italians will be in
problem.

If the Italy of the year 3000 is a highly developed country, with futuristic
robots and star trek replicators, they will just have a good life.

Sometimes, with all this chat about debt and earnings we forget what is really
important.

Do you want the future Italians have a good life? Invest in infrastructure,
technology and knowledge and don't do the opposite trying to "save" not-yet-
born people money. That should be obvious.

~~~
tormeh
Consumption is not investment. That's not to say consumption is bad or
unnecessary, but they're not the same. Nobody's talking about increased
investment, it's all consumption. Italy's government is not criticised for an
investment push it can't afford, but rather unsustainable increases in welfare
spending.

Anyway, whenever the Italian government invests, it seems to be into money-pit
clusterfucks like Alitalia, so I wouldn't be too enthusiastic about Italian
governmental investment. How hard could it possibly be to let that monster die
and use the money on something useful?

Before the Italian government can invest properly it needs functioning
politics and bureaucracy, which are the real problems anyway. Like in Greece,
they're just so hard to fix it's not even an option people talk about. It's
always magical solution X or Y ("policy"), never how to fix politics or
improve the bureaucracy.

------
DrNuke
The EU is not working for people as it worked for peace and banks. There is
nothing shameful in that, the process is difficult and has so many enemies
within and outside Europe. Italy often acts as a politics lab, let’s see what
happens in May 2019 with the general European election in the EU.

~~~
alecco
The EU is overgrown from mild benevolent rules unifying member countries on
similar traits to a massive body of law and power that nobody knows.

I used to be quite against Brexit but after seeing on of the videos on the EU
I am now skeptical. There are 3 big voting bodies: EU Council, EU Parliament,
and EU comission. The majority of people don't know the difference and nobody
knows the people in there. In the last decade they started micro-managing
everything in the EU. Think of gdpr and the new copyright rules. It's starting
to resemble a big authoritarian state.

Also they apply uniformly the same strategy for countries like
Germany/Austria/Netherlands and Greece/Portugal/Italy when they are in very
different situations. The former are quite happy with the arrangement, the
latter are trapped in a death spiral.

~~~
craigsmansion
> after seeing on of the videos on the EU I am now skeptical

The EU is almost desperately transparent:
[http://europa.eu/](http://europa.eu/)

> There are 3 big voting bodies: EU Council, EU Parliament, and EU comission.

The Council are the elected heads of state of EU members. They decide on the
course.

The EU commission is tasked with implementing that course, and producing
legislation.

The EU parliament is tasked with correcting that legislation. Although they
have little legislative power, they can dissolve the commission. In the grand
scheme of things, the buck stops with them. They are elected directly by EU
citizens.

> they started micro-managing everything in the EU.

The EU takes care of the things almost all members agree on (remember, the
Council sets the course). They don't get to be involved in high-coverage
contentious politics.

> Think of gdpr

Yes, a highly popular measure inside Europe, even by tech people who are
affected by it.

> It's starting to resemble a big authoritarian state.

Yes, they will force members to do their bidding with fish-quota, clean
beaches, and humane labour conditions.

The EU structure is a little complicated, but it's 400 million citizens we're
talking about. Its powers are very limited and is derived from 27 countries
_wanting_ to interact to try and set a course that benefits everyone, instead
of individual countries racing each other to the bottom with disastrous
results.

~~~
alecco
Yes, I mentioned both gdpr and copyright as I'm not disingenuous to just paint
the negative side only. And the point was them micro-managing law.

You conveniently kept out the copyright one.

~~~
quonn
What you call micro-managing is really regulations. And those are almost
synonymous with the single market. If regulations would not be the same, there
could be no single market (that benefits everyone, including companies and
workers), because national differences would distort that.

------
LoSboccacc
here's a better analysis [https://www.ineteconomics.org/perspectives/blog/why-
hysteria...](https://www.ineteconomics.org/perspectives/blog/why-hysteria-
over-the-italian-budget-is-wrong-headed)

this is the usual monthly forecast that gets dropped in the hope that, maybe
this time, it'll be true. we had the italy, france, greece, chinese, spanish,
portoguese, greece again articles in the last six or so month.

at some point people should realize there's a pattern of just yelling loom
hoping it sticks and that most of those "articles" when their forecasts are
tested are worse than a coin toss, because their core goal is bringing views,
not being accurate.

------
nkjoep
I just think politics has never generated employment.

Organization and the real economy do.

I think planning more debt is a mistake, especially when they have a clear (or
smart) way to spend it. (see corruption, mafia, bureaucracy etc...)

------
Bombthecat
Yesterday one of my friends said that the EU won't be anymore around 2040,
2050.

Sadly i was too drunk to ask why.

I don't think it would be the usual answer. Like credit, debt, economic fail
etc.

He is a professor in cluster economics ( no idea how to translate that)
basically he researched development of states, cities and clusters around
certain thinks like how a city develops around a river or sea or what happens
around a coal mine or easy cheap internet access (his last research)

So I kinda wonder now, why he thinks the EU won't exist after 2040/ 50..

~~~
TomMarius
Please do ask him!

------
raverbashing
It certainly could cause a crisis

Or it could be the student loans bubble bursting. Or the deficit increasing
tax cuts in the US

------
fibo
Those articles usually claim also that Italy is full of racism, I leave in
Italy and that is completely wrong. Media play with information and can happen
that media spread wrong information.

------
hal9000xp
I watched EU debt crisis since 2012. In 2015, I watched this animation about
EU debt crisis on Bloomberg:

[https://www.youtube.com/watch?v=j4_tyEl84IQ](https://www.youtube.com/watch?v=j4_tyEl84IQ)

Since 2016, I spoke with many greeks, spanish and it looks to me that vast
majority of them believe in wrong things. Therefore they will continue to vote
for left or right populists no matter what. Their left and right are anti free
market, anti fiscal conservatism, pro spending, pro welfare, against
businesses.

In very long term, EU is unsustainable. Too many countries with different
interests and huge moral hazard.

~~~
toyg
Since 2001, I spoke with many Americans and they believe in wrong things.
Therefore they will continue to vote for left or right populists no matter
what. Their left and right are warmongers, anti-internationalists, anti-peace
in the Middle East, anti-immigration, anti-poor people, against universal
access to medicine.

In very long term, US is unsustainable. Too many states with different
interests and huge moral hazard.

(Of course, I don't really believe this; I'm just showing you how your
populistic generalizations can be equally applied to any federal state on the
planet. Please try to see beyond the propaganda you are subjected to.)

~~~
hal9000xp
Usually, people who trade smarter than those who vote. So stock market is
constant voting machine for expected future earnings, it's fair to say that
indexes provide pretty accurate overview of economy.

With that in mind, if you look at SPY (US) and compare it with EWI (Italy) and
EWP (Spain), you will see that Italy and Spain are not going anywhere since
2008 and US at that time made huge progress.

[https://www.marketwatch.com/investing/fund/spy](https://www.marketwatch.com/investing/fund/spy)

[https://www.marketwatch.com/investing/fund/ewi](https://www.marketwatch.com/investing/fund/ewi)

[https://www.marketwatch.com/investing/fund/ewp](https://www.marketwatch.com/investing/fund/ewp)

Now, take a look at GDP of US:

[https://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&...](https://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&ctype=l&strail=false&bcs=d&nselm=h&met_y=ny_gdp_mktp_cd&scale_y=lin&ind_y=false&rdim=region&idim=country:USA&ifdim=region&hl=en&dl=en&ind=false)

And compare it with sad picture of Italy and Spain and Greece:

[https://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&...](https://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&ctype=l&strail=false&bcs=d&nselm=h&met_y=ny_gdp_mktp_cd&scale_y=lin&ind_y=false&rdim=region&idim=country:GRC:ITA:ESP&ifdim=region&hl=en&dl=en&ind=false)

US has populists but their debt denominated in their own currency and on top
of that US economy is very diverse and strong. US is much more business
friendly than Italy, Spain and Greece. And their debt denominated in currency
they can't print.

If you are anti-business and pro-welfare, then your business won't flourish
and at the same time you will accumulate huge debt.

~~~
toyg
Apples to oranges; I can get the same results if I compare EU numbers to
Nebraska or Louisiana. Please don’t insult your intelligence with these false
equivalences.

------
apexalpha
I love how, left or right, it always ends up being someones fault. Except
Italy.

Same story as every thread discussing Greece.

~~~
nkjoep
I couldn't agree more.

I am Italian and I think it is only Italian bad administration's fault.

All bad choices taken in the last 20 years are showing their effect now.

------
fibo
This is exagerated propaganda. Italy will do it well.

------
AllegedAlec
We should kick them, an all other questionable economies, out of the Euro, to
tbe frank.

~~~
cedivad
Let me guess, you are german. Trading deficit parity when? Or laws you signed
don't apply to you?

~~~
xn1111
Many Germans would be happy to leave the EU or at least the Euro if the German
presence is such a burden to other countries.

The Euro benefits the 1%, but not the "common" (i.e. actually working)
population.

~~~
craigsmansion
> benefits the 1%

That's an American slogan and approach, and maybe with their policies of
wealth distribution, it's a legitimate target. In Europe the resentment
against the very rich is usually reserved for those who dodge taxes.

> the "common" (i.e. actually working) population.

The common, actually working, population usually has pension build up and
savings. Try asking those people who formerly had highly volatile currencies
how they feel about having those in Euro.

~~~
fneumann
The beneficiaries of wealth distribution in Germany are unproductive civil
servants and stock holders.

Government money is being redirected to a) prevent revolts (social security)
b) sustain the privileges of the civil servant class c) prop up the stock
market and house prices for the wealthy.

The Euro facilitates this; giving public funds to country X so that part of it
is spent back in Germany (prop up the stock market) is just one gambit of
stealing money from the common population.

The working population in Germany does NOT have secure pensions in general.
Please look up "Altersarmut" (old age poverty).

And the D-Mark wasn't volatile...

