Last minute plea from Italian voters.
Italy’s nation’s current leader, Mario Monti, the darling of Europe’s governing class, is running fourth among the current slate of candidates. He trails comedian Beppe Grillo, whose obscenity-laced rants are drawing big crowds and may propel him beyond his current third place position. Pier Luigi Bersani, the Center-Left candidate, leads the pack, but he’s being pursued hard by the never-boring Silvio Berlusconi. Mr. B is trying to reclaim the office from which he was rousted 15 months ago in favor of Mario Monti, who was appointed to head a “technical government.”
The general thinking is that Bersani will hold on to win a plurality of votes and combine forces with Monti to form a new government. But while that is still thought to be the most likely outcome, it is far from a sure thing. Poll data are not fresh, since Italian law prohibits polls from being published close to the election, and any late movement by voters is thought to disfavor the front-runner Bersani and the dour Monti, to the benefit of more flamboyant candidates like Grillo and Berlusconi.
That could lead to an outcome in which it is difficult or even impossible for any of the candidates to form a government, as happened in Greece in 2011, leaving a country already beset with high unemployment and a shrinking economy in political chaos.
Despite profound ideological differences among the candidates, they all seem to agree that austerity measures undertaken by the Monti government should be rolled back. When Monti took office, Italian bond rates were soaring and threatening to push Italy into default. Monti calmed the bond markets with a program of higher taxes and lower social spending.
That program is largely viewed as a success by everyone but Italian voters. They are angry. Under Monti’s leadership, taxes and unemployment soared, pension benefits were delayed and reduced, and the economy contracted. All of the candidates are now running against the Monti agenda. Monti himself promises to roll back some of the taxes that his government instituted or raised. But that is only netting him an estimated 15 percent of the vote, as his opponents say they would go much further.
With fiscal rectitude on the ropes, a muddled election result increasingly likely, the ECB’s announcement this week that it holds a massive portfolio of Italian government debt on its balance sheet, and the EU’s assessment that Italy’s economy continues to contract (along with that of the rest of the Eurozone), you would expect investors to be spooked.
You would be wrong.
On the last trading day before tomorrow’s election, the Italian stock index rose 1.4 percent and yields on Italian 10-year notes dropped by more than 4 basis points. I’m not sure why this barrage of bad news leads investors to bet on Italy, but the fact that they are able to offload Italian bonds onto the ECB’s balance sheet seems the most plausible factor. Investors, largely private Italian banks, are willing to buy the Italian government’s debt, so long as they know that the ECB will take it off their hands.
The ECB for the first time this week disclosed just how much Italian government debt it has taken on: 102.8 billion euro ($135.6 billion) , nearly half the total amount the ECB has printed to bail out financially troubled European governments and more than twice the amount issued to the second-place beneficiary (Spain, 44 billion euro).
This is a stunning vote of no-confidence in Italian debt. Under its massive cash-for-trash program, the ECB prints euro and exchanges them for Italian bonds that private investors purchased. Italy can finance its debt at affordable rates largely because investors know that they dump the bonds onto the ECB. This allows the Italian government to continue borrowing and rolling over current debt at reasonable rates despite a shrinking economy and the growing potential for political crisis. Perhaps a government no longer needs economic growth and political stability to live beyond its means. All it takes is a central bank willing to forgive all sins.