Markets drop as Italy totters on the brink
U.S. and European markets fell Monday as investors woke up to the fact that Italy's economic problems run far deeper than one former prime minister.
Last week markets climbed following news that Italian Prime Minister Silvio Berlusconi would resign. (Europe Back From The Brink was a typical Saturday headline.) This weekend he did resign but once he was gone investors realized that he was a symptom of Italy's financial problems, not the cause.
Today the Italian bond's yield continued its inexorable climb back toward the fatal 7 percent mark. That is the (bad) magic number which caused Greece, Portugal and Ireland to effectively declare insolvency and seek bailouts from the European Central Bank. Monday morning the Italian government had to promise to pay 6.29 percent (the highest yield since 1997) in order to find buyers for $4.1 billion worth of five-year bonds. The bonds closed the day at 6.63 percent.
Berlusconi's crony capitalism, sex parties and long list of corruption charges made him the easy (and deserved) face of Italy's economic problems. But it wasn't Silvio alone who got the nation's sovereign debt up to 120 percent of its GDP. (The only EU nation with a worse debt to GDP ratio is Greece.) Nor was he responsible for the government's industry-sponsored efforts to discourage competition and growth.
The nation's economy is built around the manufacture of high quality goods by small and medium-sized business, many of them family owned. Those businesses have done everything they can to stop new companies from being able to challenge them. This has meant colluding with unions and the government to keep workers happy via higher pay and benefits. The nation also has a tax-collection system seemingly designed and enforced by people who don't want to pay their taxes. No surprise that corruption is rampant and that, according to the CIA, as much as 15 percent of GDP is based on the "underground economy."
Prime minister-designate Mario Monti pledged to act "with a sense of urgency" to identify ministers in the new government but said he would also take the time necessary's to secure a strong team. Time is something he doesn't have.
