Friday, 22 February 2013

Italy Must Default Under Whatever Polite Term Chosen

Two Italian political leaders have called for Italy to default on its $2.3 trillion debt:  Silvio Berlusconi, for default and reversion to the Lira;  and Beppe Grillo , for default inside the Euro and renegotiation of Italy's relations with the European Union at large, not just the Eurozone.

Italy has the highest primary surplus in the Eurozone, indeed in Europe;  it has a positive trade surplus;  60% of its trade is extra-European Union.  Italy can pay government expenditures out of current government revenue, and have resources left over, if it does not have to pay interest on historical debt.  Italy can import what it needs and pay for it with its exports when it does not have to pay interest on historic debt held abroad.  It is not dependent for trade on the good will of the European Union. Italy, with an advanced and diversified  economy slightly larger than that of the United Kingdom, is no Greece.

It is time to require forgiveness of a large part of Italy's historic debt and acceptance of rescheduling of debt maturities  - that is if the Eurozone wants to keep going at all - unless the European Central Bank is  willing to intervene on a larger scale without penalty conditions of any kind in support of Italy's refunding its debt.  It is time  for Germany to pull its head in and recognise that there is a general election in November that will go badly for their elites if Italy stamps its foot on Sunday and rejects the Bersani-Monti axis.

Looking at the  extraordinary, overwhelming  rally in San Giovanni for Grillo this evening, and the huge numbers in Naples for Berlusconi, it looks as if Italian voters understand all this and are determined to end an 11% unemployment rate, a lack of growth, a wrecking of life chances for the young, and the impoverishment of the old in the name of an economic policy wholly concentrated on the furtherance of German and other European  elites' interests.  We don't need any of the current economic and social destruction. What we need is a different Europe. 
The Five Star Movement Rally Addressed By Grillo This Evening



Caronte said...

Default, of course, would involve losing access to international financial markets for a decade or more, and might contaminate the whole Euroarea.

But then, if Italy succeeded in maintaining a primary surplus (witholding the payment of interest on its debt) and a trade surplus, this option would be less costly than paying full interest on debt and reducing that debt from 127% to the statutory maximum of 60% of GDP in 20 years as required by the so-called fiscal pact - a veritable suicide pact.

Jeff Wood said...

Much could depend on to whom the Debt is owed.

To the extent it is owed to international creditors, a unilateral rescheduling might be uncomfortable, but if Italy needs no new borrowings, the problem can be managed.

If the bulk of the Debt is owed internally, management should be easier in principle, but individuals and pension funds need continued income to exist, even if they can delay capital repayment. Again, if no new borrowing is needed...

The real cross on which Italia is being crucified is the blasted Euro, which really needs nuked, in a controlled way of course.

Grillo and Berlusca: the thought is most intriguing.

hatfield girl said...

The Euro is closing down some of the means of dealing with the debt, agreed Jeff. However the UK, for instance, is having serious debt problems even outside the Euro.

Nation state governments of large, competent economies need to end all the kowtowing to iffy creditors. The Euro's problems are not debt problems.

Time for 'can't pay, won't pay.' As C points out, a denial of credit for a decade is cheaper than paying interest on the debt and doubtless the same is true for UK debt as well.

Anonymous said...

You should bear in mind, HG, that the saving from default is not just the yearly interested owing, but also avoiding the accelerated repayment of the debt in excess of the statutory 60% of GDP over twenty years, i.e. (127%-60%)/20 or over 3.3% of GDP per year. Pension funds and small investors - Jeff's worry - could be treated more favourably.