Downgrades and Indecisiveness

My warning yesterday was that the Cyprus memorandum would not be sustainable; this morning the Standard&Poor's rating agency rushed to agree with me. In their report, they state that the two-notch downgrade to CCC+ is because of  a considerable and rising risk that the country, may default. Heavily exposed banks (with the banking system assets around €95 billion), an optimistic forecast of a 3.5% contraction in GDP and EU indecisiveness with the agency calling it "hesitant attitude of Cyprus' Eurozone partners toward sharing the cost of a severe banking crisis" are what the S&P see as causing the most trouble.

S&P headquarters in Manhattan, New York.
Source: Wikimedia Commons Author: Beyond My Ken

Well, this isn't something new: the EU leaders speak of more union and yet fail to keep up with what they suggest. The EFSF/ESM funds have been created exactly because sovereign governments should not be liable to rescue banks unassisted; official EU assistance should be made available in order for the underlying country not to assume large debt burdens. Yet, the funds have not yet supported neither Greece nor Cyprus and thus far I am not quite sure about what they plan to do with Spain.

Spiegel states that the IMF officials have demanded a debt haircut before anything is signed. Unfortunately, these people appear to be as stubborn and unwilling to change their minds as the EU colleagues. It would appear that narrow-mindedness is in the job description.
Question 1: Who owns the majority of the Cyprus sovereign debt?
Answer: EU banks, notably Greek and Cypriot banking institutions
Question 2: Who is going to be in trouble when a debt haircut occurs?
Answer: The Cypriot and Greek banks who are already in life support.

The point of the above two questions is that if a haircut occurs, then the IMF and the EU will need even more money to support the system. What has happened to Greece will be repeated in Cyprus as well. Two or more years of a huge recession, which will destroy the economy's production capability, throw consumption down the drain and minimize investment. Austerity measures will lead to more austerity measures and the result will be like a vicious cycle.

The EU officials fear that a haircut will undermine investor trust in the Eurozone. You think? Undermine is putting it softly. What do you believe a major investor will think when every time a country faces trouble the EU forces it to cut down its debt? Obviously there are safer markets and better returns to put his money in. Now my question becomes: what do you think will be easier than the EU supporting the Cypriot or any other country's banks directly, just like it announced it would do? Incredibility once again. And then politicians wonder why markets do not trust them. Even if direct support from the EFSF/ESM funds cannot happen (if this holds then just shut them down why keep them?) then why not lend the country with an interest rate of 1% or lower, or even cancel interest payments for the first two years? Either of these should work and this was what they should have done with Greece.

In a short note, moving to a different country, Italy's Prime Minister Mario Monti is expected to resign tomorrow and new elections are to be held. God only knows if things will ever get better in the country as one of the most popular candidate appears to be former PM Silvio Berlusconi. If any of the readers has ever watched Frank Capra's "Mr. Smith Goes to Washington" then you will certainly see the similarities. Old, rich guy tries to gain more power for himself by manipulating the media channels he owns. In the movie, however, we were pleased to see a happy ending; now it is time for the Italians to choose their own.

Povera Italia

Prime Minister Mario Monti. Source: Wikimedia Commons. Shared under CC license 2.0

It looks like things are about to get worse for the Italians, since Prime Minister Mario Monti has announced to the president Giorgio Napolitano his plans on resigning when the 2013 budget is passed. The situation for the Italians is not expected to get any better after Super Mario has resigned. They have no suitable politicians to rule the nation (perhaps with the exception of Matteo Renzi) and all of the important reforms that Monti's government planned on promoting will not be approved.

The Economist states that some of these reforms are: "... bills on competition, taxation and the simplification of bureaucracy. Another would have put into effect the new constitutional requirement for a balanced budget. Perhaps most importantly, a package of measures to stimulate economic growth is vulnerable...". Even more importantly, his departure will destroy the Italians' hopes of seeing a new electoral law, instead of an improved one which will guarantee they will not be robbed of meaningful representation.

The reasons behind Mario Monti's sudden decision, is that with Silvio Berlusconi back in politics (ah poor country, how much more can you last?) the latter's political party (PdL) has removed its support from the current government. The Economist believes that Mr Napolitano will also resign, adding more uncertainty to the situation. 

Berlusconi is now promising tax cuts to get some voters on his side. To those who are thinking that he would do so, I would remind you that Mario Monti has already done so, despite the unfavourable economic situation. If it wasn't for Super Mario, Italy would have already opted for a bail-out very long ago. The current government gives the Italians something that they had been looking for a long time: credibility and trust.

Now it is up to the Italians whether they will choose to continue with a stable government which would bring them on a much better path than one which is based merely on promises and corruption. People get the politicians they deserve. Let's hope that the Italians are careful on what they choose because they will not have anyone to blame but themselves.

Berlusconi Behind Bars Now!

On Friday, a court in Milan had sentenced the former Italian Prime Minister Silvio Berlusconi, to 4 years of jail for crimes concerning tax fraud related to the acquisition of TV rights by his company Mediaset. He was also banned from public office for five years and ordered to pay €10m (£8.3m) to the Italian tax office, but these are just minor compared to a 4-year incarceration sentence. Nevertheless, as we now read, Berlusconi will most likely never see a prison cell in his life. 

Well I hope not! Source: http://www.soxfirst.com/

The reasons are simple: In 2006, a centre-left government had introduced a 3-year amnesty for crimes committed before that year, which would mean that Berlusconi's sentence would essentially be reduced to 1 year. In addition to that, the former Prime Minister is entitled to two appeals before a definitive sentence. Given the speed of the Italian courts' this would probably never end, as the aforementioned trial lasted for about 6 years and the statute of limitations (a legal term stating that if a legal system has a statute, for example, limiting the time for prosecution of a debt or crimes designated as misdemeanors to two years after the offense occurred, under such, if a person is discovered to have committed a misdemeanor three years later, the time has expired for the person to be prosecuted.) of the Mediaset case will take effect in about a year from now. In addition as an Italian journalist has stated in The Guardian: "The fine and the ban on public office will only take effect after the final appeal, but if he is given a conclusive conviction, he will have to leave parliament. In Italy, you go to jail only if you receive three years, so if the sentence is cut to one, Berlusconi will not go to jail."

Well if you ask me, this is something more than ridiculous! We expect our citizens to respect the laws, nevertheless it takes 6 years to complete the trial of an "important" member of the society and it will probably take as long as that to reach a definitive conclusion. And he will not even be put in jail. This is not just for Berlusconi. The former Prime Minister is an example of a judicial system which does not function properly. People in Italy, Greece and Cyprus (and to a much lesser degree in Spain and Portugal) are certain that the rich will never pay for what they have done! And the courts do nothing else than to confirm this notion.

In another article, a commentator in The Guardian has stated that even though Berlusconi will never see the inside of a prison cell, the decision matters politically as its party now has much less support than before. He is implicitly stating that the Italians, fed up with corruption and paid politicians/policymakers/lawmakers will will make a better choice for leaders this time. 

I am not sure of that. If Berlusconi, or any other "Berlusconi" for that matter, is allowed to walk away like nothing has happened, then what is the point of sentencing him? It is the same as politicians promising a million things and not doing even one. People are tired of this. They want credibility. They want a person who will say something, mean it, and then do it. Theories and political games are out-of-date. They want leaders and policymakers/lawmakers who are not afraid to stand up for what they believe and fight for it. They are not afraid of a corrupt system nor of the power of industrialists and businessmen. 

This is the main reason why "Golden Dawn" has become so successful in Greece: they do what they say they will. (for an excellent article on Golden Dawn read Protesilaos Stavrou's article here or here) Even if I disagree with what they represent, what we must understand from their action is that people prefer honesty to anything else. 

And this is exactly what must be done in the South. We need a system which we can trust, a system where even though some occasional members will be corrupted, we have to know that this will not be tolerated. But most of all we need honesty. We need people who they will say something, mean it and do it. We need more people like Giovanni Falcone and not like Silvio Berlusconi or the majority (if not all) of politicians in South.

And that is why Berlusconi needs to be sent to jail. To signify the end of an era of corruption, control of government by industrialists, and an era where money made a difference whether you could be behind bars or not. Let's hope that the people of Italy and the Italian courts make a stand on this.