Jul 12, 2011

Italy, with or without reasons?

It looks like Italian markets are under attack.
There may be good reasons for that, like general structural weakness. But Italy is not Greece and there are also good reasons why many people would not expect an Italian default.

Of course, whether markets will continue to provide Italy with sufficient financing depends not only on macroeconomic and fiscal fundamentals, but also on factors that are outside of Italy’s control (such as investors’ appetite for European debt).
Edward Hugh

So, much of Italy’s interest burden is paid to Italians, and some of it is paid back to the government as taxes. As a result, Italy’s public debt dynamics are better than those of the PIGS.
The PIGS' external debt problem (May 8, 2010)

L’Italia ha un alto debito pubblico (come i greci) ma un deficit pubblico che è diventato relativamente basso rispetto alla media euro. Ha un’ottima capacità di penetrare nei mercati esteri, con l’export di prodotti della meccanica, del tessile, abbigliamento, cuoio e calzature (erano in tutto 140 miliardi di euro nel 2008).
[...] Con questi fondamentali, se gli speculatori vorranno attaccare Italia, Spagna e Irlanda si bruceranno le dita.
Perché i PIGS no esistono (May 4, 2010)

FT video - Vincent Boland
FT video - Edward Hadas

Maybe Italy is too Italian and whatever else you may like in order to give reasons of what is going on...

You can try to rationalize what's happening, but the fact is that markets do not need to be rational, in the sense that they mainly respond to fundamentals, and expectations neither.
We all know that, Keynes knew that. And there is a simple reason for that: there is no "market", there are people. And no one buys a bond just because the country is safe, it has a low debt, it is growing, it is productive or its political situation is stable etc.
You simply buy a bond because you expect it to be a good investment, full stop.
The point of having good fundamentals is to decrease the likelihood of default expectations.
Now the question is just one: would you buy Italian bonds?
And as a corollary:
Do you believe other people would buy them?
Did I ask something about fundamentals? No.
Would you need to know something about fundamentals, if you knew what all other people were going to do? No.
You go looking at fundamentals just because you are not in other people mind and you might think they may react somehow to this common information. We do not really know much more.

Oscar Giannino seems to have the same opinion when he writes:
E’ ovvio che non è successo nulla che abbia modificato i fondamentali. Non sono emersi ammanchi pubblici non rivelati al mercato, e restiamo l’euromembro che ha fatto in questi anni meno deficit pubblico subito dopo la Germania. Le banche italiane non sono state salvate dal denaro del contribuente né due anni fa né oggi, ma stanno ricapitalizzando con risorse dei propri soci. E allora? Si è ufficialmente aperta una finestra molto succosa per il mercato mondiale: scommettere...
Oscar Giannino

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