Quitaly - Sample 2019
If the spaghetti hits the fan, here's your script
From the December 2018 issue
The Italian fiscal and economic morass is certainly not going away, and Italy's new government has basically set the country on a collision course with Brussels. (For a 10-minute synopsis, see Desmond Lachman's October 10 posting on aei.org, titled “It is Italy's economic growth, stupid.”)
This thing has some potential to be Greece on steroids, if only because Italy's moribund economy is so much larger, as is its sovereign debt, now at 130% of GDP and rising. Italian banks are burdened with 400 billion euros of public debt, and non-performing loans are well in excess of 10% of their balance sheets. Foreigners have been taking capital out of the country at an alarming rate.
In the old days, a sovereign country with its own currency could—when it dug itself a hole anywhere near this deep—simply devalue, and go on. Within the Euro straitjacket, this is obviously impossible.
So don't get blindsided when, as I suspect it may at some point, the Italian “crisis” rattles world markets enough to become, for some number of
24-hour “news” cycles, the apocalypse
du jour. If you have an adult memory, you remember how the media blew up the analogous “crisis” in Greece—a country with about the same GDP as Hackensack, New Jersey—into a drain which the entire Western world was alleged to be circling. Imagine the field day they're going to have with a much larger Italy, given half a chance.
Whatever you do, don't get drawn into debating the fiscal policies of the Eurozone. Indeed, don't take on the analysis of the “crisis” in any way whatsoever. In the end, all fiscal crises are debt crises, and their resolution becomes a matter of whose ox gets gored, as the debts get rescheduled, written off, and both. Between Rome and Brussels, our attitude as advisors should be, “Let's you and him fight.”
Permit me therefore to offer a short, sweet, hands-off script, beyond which you needn't and shouldn't be drawn:
- This was inevitable; it was always a ‘when' rather than an ‘if.' The European Union was built on sand from Day One: a single central bank and currency without a single state was and is inherently unsustainable.
- Italy is probably too big to fail and too big to bail, so it will be mildly interesting to see how the Europeans extricate themselves from this one. Maybe Italy stays in the EU somehow; maybe it leaves and goes back on a devalued lira; maybe it'll snow on Christmas. Please don't ask me to know, much less care.
- In the meantime, tune out the apocalyptic “contagion” scenarios, to the effect that the whole Western financial/banking system is being washed away on the Tiber.
- Go back to focusing on our long-term plan, which—as I'm sure you've noticed—centers on buying equity in rational, profit-seeking public companies, as opposed to lending our capital to irrational democracies with governance reminiscent of the Marx Brothers.
- I freely grant you that this is making a lot of noise at the moment, but in the long run that's all it is: noise. Over and out.