On Italy’s (alleged) financial woes

My Facebook posting of a link to what I believe is one of the few well-balanced opinion articles about Italy’s financial situation (written by the Daily Telegraph’s Andrew Lilico) has sparked a very interesting discussion with a rather smart friend (whom I’ll call PK) from central Europe, in the day when Italian bond yields have reached Euro-time records.

I’ll report the debate with PK as it went, and you judge for yourself. Remember that only time will tell who’s right (and that’s usually me).

PK: Europe is a net exporter of capital. The reason that peripheral European governments cannot get financing is not because there is a lack of capital or liquidity problem but simply because their solvency is questioned by investors. They need someone foolish enough to lend money to countries that probably won’t repay. Look at Greece and talks 2-3 years ago about its “solvency” followed by bailout plans and today recent “voluntary” 50% haircut “so far” to private creditors.The confidence is lost by a lack of political will to tackle the problem and Italy seems to follow Greece footsteps. European major banks are keep selling south European sovereign governments bonds, including Italy since months. It is one of the reason Italian bond yields are rising sharply in spite of political hype about EFSF “rescue” fund. In the long term this situation is not sustainable. Italy alone has to roll over 300 billion euro just in 2012.. Who is going to buy it ? It was a very different situation back then in 90′s in Italy, so this article is missing a point to a large extent.

Mac: Italy will pay back even at 10% interest. Actually our finance is in better shape than France’s or in some respects even Germany’s in that our state income is largely independent of economic growth. The recent attack is simply France’s way to hide this. Unfortunately, our politicians seem to be unable to bring this clear and simple message out to the markets.

PK: I presume you mean recent France’s government deficit that indeed was considerably higher. However both France and Germany has a vital interest to keep Italy afloat, as their banks have a serious share of sovereign debt of Italy’s. In my view the question is not even whether Italy is willing to pay 10% interest, but whether in case of rising yield rates it will be able to finance its needs on the market = finding investors to whom they can sell bonds. If not – it will follow Greece, Portugal and Ireland shortly. In the longer term a main problem of Italy’s is not even high debt but progressive loss of its competitiveness since entering eurozone and one of the lowest economical growth amongst developed economies. It would be much easier if you have no euro and devaluate, but then you’d have other costs to bear. So in case of further worsening of market conditions Italy might be forced to get an official support from EFSF (ECB has already actively intervened). It can be a temporary fix within existing framework, but it always come at certain political costs and it might imply further loss of country’s credibility. That’s why it can’t be considered as a long term solution either. Italy’s debt is huge and it has relatively short maturity, so it could be potentially more vulnerable than other countries – especially in case of further deterioration of the market sentiment that cannot be ruled out. So far European policymakers are kicking a can down the road – buying more time and going deeper into debt. It will not work out forever…

Mac: Your point is valid, but the issue is all about speculation. In practice, I don’t deem possible a scenario in which Italy has to resort to foreign intervention to pay its debt (it’s happened recently but only in order to keep speculation astray). The Greek, Irish, Portuguese and even Spanish and French situation is far worse than ours. Your point on the economy is also only partially valid, as we do have growth, it just does not appear in the stats as the black market is huge.

PK: I agree that some other European countries have even bigger issues ahead (especially Greece that in fact has already bankrupted). However today it is Italy not without a reason in the foreground. I’d recommend to read a book written by Beth Simmons – “Who Adjusts” (check Amazon). There is a strong argument that one of the problems with a debt crisis is that when debt levels are perceived as being too high, major stakeholders are forced into behaving in ways that reinforce credit deterioration and exacerbate the debt problem. This is what happened to others and similiar case could be observed now in Italy. When adding low growth, significant size of underground economy (missing taxes and widening gap in social state revenues etc. = lost benefits for the state, it implies faster growth of debt) and declining competitveness – that’s a root cause of today Italy’s problems. Surely each trend is reversible, but not without pain. Take a look at the latest IMF report dated June 2011 about Italy’s economy. Let’s see how it will unravel in the coming months…

Mac: Our debt has been high (and stable with respect to GDP) since the early nineties. What’s changed recently? Moreover, the interest rates on our bonds has been much higher than today (check this graph). I am currently allocating a substantial part of my investment into Italian long-term bonds, and I’ll sleep tight knowing that my country will pay back. I have, however, sold all holdings in French banks. I’m not buying German bonds as the yield is lower than inflation, so I’d better keep my money in my bank (also being pretty sure it won’t collapse).

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As I spend more and more time in my country after so many years, the superstitious mindset of its inhabitants becomes more and more evident.

For example, Alitalia planes don’t have any seat row number 13, nor 17. The reason is that they are both believed to be unlucky numbers by a certain amount of people.

You can see this rather medieval aspect of life almost every day. Cars are filled with strange objects that are supposed to bring luck to the driver and occupants. Football players engage in funny gestures when entering the field. Newborn babies aren’t dressed in red as it allegedly brings bad luck. Handshakes are never crossed when four people are being introduced. And the inevitable black cat that crosses the street causes one too many U-turns.

It’s no surprise, though, that several people reportedly fled Rome today, as an earthquake had been predicted with dubious methods by a bloke who was half astrologist half magician several years ago. It really happened!

To me, all this superstition is a mere symptom of lack of education on basic laws of nature. But perhaps my engineer’s mindset is playing too strong a role here.

Anyway, enough writing for today – I’ve got to go and throw some salt over my left shoulder.

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And the bike died

Today I’ve pushed my Duke to near the top of the rev range in third gear (that’s way above legal speed by the way haha) during a quick tunnel overtake, and all of a sudden the bike died, as if someone had pulled the spark plug out.

No lights, no engine, no indicators. Plenty of panic.

Luckily I have managed to reach the end of the tunnel by inertia, and could safely stop to check what was wrong. Turned the injection key on again and everything was back to normal.

Such behaviour was kind of weird, so I brought Duke to the mender. The verdict is that an electricity switch has rusted, and a high amount of cables around the battery need changing. The root cause seems to be a missing rubber cap (in turn probably due to a rather questionable job done by the guys who fixed the battery the previous time – yes, it’s you, Ducati Siena)

Some serious cost management will soon be required. I am pretty sure Ducati makes far more money from spares than bikes. The investment is not going to be debated, though, for the feeling of stopping in the middle of a dark, one-lane tunnel more than pays back for all the costs of repair.

Posted in Fixing stuff, Motorbike | Leave a comment

Fixing the kitchen for a year

This is a long story, so be prepared with a cup of coffee or your favourite beer.

Back in 2007, we purchased a flat, which is actually a part of an old farmhouse. It got heavily restored (read: demolished and rebuilt) and we could customise it the way we wanted. Check the picture to see how it was before the building works (yes, it’s the pile of rubble in the middle of the image!).

Now one of the key things in any house is the kitchen. Even more so if you are a cooking freak like me. We spent countless days specifying all details of our new kitchen, which we then had purpose-built and installed by a local company.

Generally, the work was rather well done, even though the oven is only loosely fitted and some of the finishing is quite poor. But hey, it’s a rustic house and we can live with it.

Then last summer something unpleasant happened: the inner listings of one of the doors started detaching. It was quite annoying since you could not close the shelf door without scratching the next one. We called the company that installed it and they came and examined the issue. Diagnosis: it was definitely a problem with the gluing, and they would order a warranty replacement. We’re talking August 2010 here.

Unfortunately,  all manufacturing companies are closed in Italy in August, so our local dealer said they would order a spare door in September. I reminded them again in October and they assured me that by November I would get it.

In December I started getting frustrated and visited their shop. They apologised and told me they had had a rush of deliveries for the Christmas season. They also offered to glue the door listing temporarily while the replacement gets shipped. We happily agree, they sequester the shelf door for a few days and come back with a reasonable fix, which we install again hoping that the spare would be delivered soon after.

It’s now March and no movement has been witnessed. Earlier on today I visited the dealer again, and told them the listing is starting to detach again (which they also had forecast as they told me the gluing was only a quick fix that wouldn’t last long). The guy was visibly upset about it, and told me: let me come and visit you this afternoon (deja-vu!).

As he came, the next problem was that he could not find the right colour. He asked me for a copy of the invoice, and I replied that they never printed an invoice (common trick in Italy so they don’t pay tax) in spite of my numerous requests and reminders. He then checked a few colour samples and left, saying the spare will probably be with me in April.

Obviously, I don’t expect them to actually order it before another couple of reminders, so by the end of the story replacing a faulty shelf door will have been around a year of work.

This is a good example of the average level of service companies: low customer service, high degree of unreliability and lots of time wasted doing the same things all over again.

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After a 30 km ride amidst thick fog…

… here is the view I was presented with – the magic of Tuscany!

Posted in Landscape, Motorbike | Leave a comment

A New Life

So I finally have got rid of the Iranian Madness blog – all its post disappeared except for a semi-unreadable dump somewhere in my hard disc.

I’m now in Italy and it doesn’t make that much sense to keep writing about Iran.

I’ll keep this blog to talk about the things I’m doing in my new country – the one I was born in.

Stay tuned!

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