Italy and Spain – A Political Mess

In Italy the upcoming election has suddenly become a cause for growing concern. The reason is the scandal surrounding the Monte Di Paschi di Siena bank, the oldest surviving bank in the world and the effect it has on the upcoming election. After having come through the monetary and economic upheavals of six centuries unscathed, the bank's current management has succeeded in running the bank aground in the space of just three or four years. It has already needed two government bailouts to stay afloat, and is now involved in a scandal over 'shady derivatives deals', which in modern parlance means 'derivatives designed to hide the true state of affairs'. Readers may recall that the government of Greece used such derivatives to lie its way into the euro way back when, and to continue to lie about its debt and deficit for almost a decade (Goldman Sachs was the helpful provider of this particular derivatives deal).



Monte Dei Paschi

Monte dei Paschi di Siena's share price over the past five years – click for better resolution.



The thing is, Monte dei Paschi is thought to be 'close to the PD', the center left party led by ex-communist Luigi Bersani, that was hitherto widely expected to be the election winner by a wide margin.

Back in December we wrote:

“At the moment it actually doesn't look very likely that Berlusconi can achieve anything more than getting a solid voting block in parliament if he's lucky – which would be good enough to protect him and his personal interests. The markets are therefore still only marginally concerned, even though the occasion was used as an excuse for some selling in Italian debt and stocks.


Judging from this relatively muted market reaction there is as of yet little reason to worry. However, we can understand why the eurocrats might be getting cold feet. For one thing, as unpredictable as Berlusconi is, he is a wily political operator who has pulled many a rabbit out of his hat in the course of his career. It would certainly not do to underestimate him. And there is another problem, even though the press is passing over it with silence: the established parties are all in trouble. There is e.g. Beppe Grillo's Five Star movement waiting in the wings. As of yet it is not known how it will do in an actual election, but if it does as well as some polls have suggested, then it is by no means certain that business as usual will continue without a hitch after the election.”


(emphasis added)


Berlusconi's Comeback

And wouldn't you know, here we are a month and a half later and Berlusconi is indeed busy 'pulling a rabbit out of his hat'.

Reuters reports:

“A scandal over shady derivatives deals bleeding money at Banca Monte dei Paschi di Siena has thrust Italy's third-biggest lender into the country's election campaign and risks embarrassing the center-left over its ties with the bank.

The bank, which had to request a 3.9-billion-euro state bailout ($5.2 billion) last year, is widely regarded as close to the center-left PD party, which is leading in opinion polls and controls the Tuscany region where Monte dei Paschi is based.

Monte dei Paschi's woes deepened on Tuesday after reports it would book a loss of at least 220 million euros due to a 2009 derivative trade with Japanese bank Nomura, one of several deals currently under scrutiny. Its former chairman Giuseppe Mussari stepped down as head of Italy's banking association on Tuesday after Nomura said he personally approved the deal, though he denied any wrongdoing.

Center-right and far-left politicians campaigning for next month's vote seized on the scandal to accuse the PD of mismanaging the bank, the world's oldest, and criticize outgoing prime minister Mario Monti for using taxpayer money to save it.

"This Monte dei Paschi story confirms that left-leaning banks can allow themselves all sorts of distractions, naturally at the expense of the tax payer," said Antonio Leone of former prime minister Silvio Berlusconi's PDL party. "The icing on the cake is that Monti has granted a 3.9 billion euro loan to Monte dei Paschi, obviously taking that from our pockets."


The bank's executives also face a grilling by Beppe Grillo, a comedian now leading the anti-establishment 5-Star Movement, which could emerge as Italy's third-biggest party in the vote. Grillo, a Monte dei Paschi shareholder, said he would attend the bank's extraordinary shareholder meeting on Friday to say that the bank should be nationalized.

"I don't see why we should give almost 4 billion euros in public money to cover up a bunch of thieves," Grillo told Reuters in an interview in his campaign camper after a rally in Pomezia, Italy, on Wednesday. "The thieves' assets should be seized. We need to start over and let the state take charge." "The PD is no longer a party. It's a bank," Grillo said, adding that the relationship between Monte dei Paschi and the PD "must be broken."


(emphasis added)

It sure sounds like the PD and Bersani are in hot water over this. Beppe Grillo and Berlusconi both have seized the moment. As Ambrose Evans-Pritchard reports at the Telegraph:

“Markets have been extraordinarily complacent,” said sovereign debt strategist Nicholas Spiro. “The prospects of a stable and reform-minded government in Italy are very slim. We think a nasty surprise is coming.”

In Italy, ex-premier Silvio Berlusconi has upset the political landscape just three weeks before elections, surging back into contention with vows to rip up “German-imposed” austerity policies and cancel a hated property tax. His Right-wing alliance has risen to 28pc in the polls, relishing a widening scandal at Banca Monte dei Paschi that has embroiled the Italian left.

“Austerity in countries already in crisis pushes them into a very dangerous recessionary spiral. These policies have left 50m Europeans unemployed or short of work. We need to get rough with Germany, otherwise reality will force a number of countries to leave the euro,” he said.

Anti-euro comedian Beppe Grillo has climbed to 18pc, though he may have gone a step too far by inviting al-Qaeda to blow up Italy’s parliament. “We’ll give them the co-ordinates,” he said. A hung parliament is now likely, with eurosceptics between them controlling the senate.


(emphasis added)

Meanwhile, the EU technocrat Mario Monti had harsh words for the give-aways Berlusconi is promising in order to bribe voters. However, it seems rather unlikely that this will impress Berlusconi or his voters much.

“Silvio Berlusconi’s campaign promise to give Italian taxpayers a cash rebate of 4 billion euros ($5.4 billion) was criticized by Prime Minister Mario Monti as an attempt to buy votes.

“We can call it a quid pro quo or even a friendly attempt at corruption,” Monti said today in an interview with RTL 102.5 radio. “Berlusconi wants to buy the votes of Italians with the money that Italians had to turn over to cover up the shortfall left in the public accounts by Berlusconi, who governed for eight of the past 10 years.”

The rivalry between Monti and Berlusconi, a three time former premier, has escalated as Italy approaches parliamentary elections Feb. 24-25. Monti replaced Berlusconi as premier in November 2011 and imposed austerity to protect Italy from the worst of the Europe’s debt crisis. Berlusconi is pinning his comeback attempt on a pledge to roll back Monti’s budget rigor and yesterday announced his plan for a tax rebate. “That man there, Monti, increased unemployment by half a million in 13 months of government,” Berlusconi said today in an interview televised on La7. “These are the real things. Not the baloney that people keep repeating.”


Berlusconi, the most successful politician of his generation, is gaining in public opinion polls even as he stands trial on charges he paid a minor for sex and appeals a four-year prison sentence for  tax fraud . His anti-austerity push has resonated with Italians hurt by recession and weary of the tax increases put in place by Monti.

Berlusconi, 76, closed the gap with front-runner Pier Luigi Bersani to 5 percentage points in an SWG Institute survey last week. He has denied all charges in the sex-with-minor trial, which also includes an allegation Berlusconi abused the power of his office.”


(emphasis added)

Not surprisingly, this sudden comeback by Berlusconi has financial markets very worried. We can imagine that the eurocracy is likewise alarmed. Perhaps Olli's curse will indeed strike again after all?




The MIB Index in Milan has begun to tank as Berlusconi gains in the polls – click for better resolution.



We already wrote about Spain and the growing political scandal there recently, but would add here that whether or not the allegations against Mariano Rajoy are true, the political damage is very real. As some of our correspondents in Spain have intimated, there may be a power struggle going on within the PP (Rajoy's party), which may actually have been the reason behind the recent leaks to the press. There are some to the right of Rajoy that may hope to profit from the situation, but also some to the left of him that would like to enter into a coalition with the socialists. Be that as it may, it sure has begun to hurt market confidence. Stock markets in both countries (and the rest of euro-land) have come under pressure, and even the hitherto apathetic CDS markets have woken up again.





The IBEX in Spain – the lateral support level we pointed out recently has been broken – click for better resolution.




5 year CDS on Greece, Portugal, Italy and Spain – curling up from recent lows – click for better resolution.



Spain's ten year government bond yield has turned up from lateral support as well. The ECB may soon find its promises tested – if there is anyone to negotiate with, that is. If Spain's government were to fall and new elections are called, then there may actually not be anyone. Similarly, in Italy the election could bring about a situation that won't exactly be to the central bank's liking. Will Berlusconi support the harsh austerity that would be imposed in the event of an ESM bailout? We doubt it.




Spain's 10 year government bond yield, weekly candlesticks. Rising from a level of lateral support, with a recent bullish MACD divergence supporting the move – click for better resolution.



In short, 'interesting times' may be about to make a comeback in Europe. Stay tuned.


Charts by: Bloomberg, BigCharts



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