Wry & Dry

Italexit may be next.

There are many good things about Brexit, as W&D observed last week, and, indeed, earlier.

But one not mentioned anywhere is that the Brits voted themselves out of the EU.  They will leave because they-the-people wished it so.

W&D now turns readers' minds to a European country in so much economic strife that it may be forced to leave the eurozone.

Italy is an economic basket case of Maximus proportions.  But it is not Greece.  It is worse: the country (i.e. GDP) is almost 10 times larger than Greece!


Consider two unarguable facts.

1.  The Italian government cannot pay its debts.

Government debt/ GDP (133%) keeps getting worse because of the denominator is going down and the numerator is going up.  The tailwinds of a cheap euro, cheap oil and cheap money kept the ratio level last year.  But that triple sprinkling of fairy dust is fading.  And the budget deficit is growing.

The EU Fiscal Compact requires Italy to run budget surpluses large enough to cut its debt ratio by 3.6% of GDP every year for 20 years.  So who is on planet wishful thinking:  the EU or Italy?

2.  Italian banks are virtually bankrupt

Italian Banks have €360 billion of non-performing loans, about 19% of their balance sheets.  This makes them technically bankrupt.  But they dare not write down any of the bad debt because their capital ratios are too low already.

A forced recapitalisation would mean a 'creditor haircut', that is, holders of Italian bank bonds would forcibly have their debt converted to equity.  This is also termed a 'bail-in'.

Warning!  Warning!  About 50% of Italian banks' €67 billion subordinated bonds is held by retail customers.  So, who is going to tell Franco Capone that the bonds the interest on which he was living are now virtually worthless bank shares that will not pay a dividend in his lifetime?  

Nuh, political suicide.

But wait, there's more.

The official unemployment rate is 11.4%  The youth unemployment rate is 65% in Calabria, 56% in Siciliy and 53% in Campania.

Industrial output has dropped by 35% since 2008, and investment by 59%.

Its fertility rate is 1.4, well below the replacement rate of 2.3 children per fertile female.  Fewer babies were born in Italy in 2015 than any year since the Italian state was formed in 1861.  In 2016 its population is expected to increase by 3,319 people, boosted by over 100,000 migrants.

Time for Italians to get themselves out of this rut.  

By the way, the bookies have Italy at $6 as next to leave the EU, well behind Greece ($2.50), France ($3) and Sweden ($5).