et dimítte nobis débita nostra - Why the fuss about Italian politicians floating dreams of debt repudiation is totally out of place

 

et dimítte nobis débita nostra

There has been in the past month or so a renewed attention to words said by important Italian political figure, most notably Mr. Sassoli, the current President of the European Parliament,  and more recently Mr. Fraccaro, who is a notable figure in the present Italian government. 

After their words, or as a poetic Italian phrase says, "Vóce del sén fuggita" , a lot of commentators have rightly pointed out the absurdity of the idea. For a good cut on that, in Italian, there was an article by my friends Luciano Capone e Carlo Stagnaro, that you can find here. 

What they did not provide, given that space is at a premium on a national paper, is a framework about WHY  Italy beats anyone else at producing AND ADVANCING TO HIGH OFFICE such outstanding human material.... and keeping it there even after they opened their mouth.

So, I think I should give an explanation about why those words did not appreciably increase my heartbeat, things that non Italians are usually unaware of, but other Europeans should. So if you see an EU citizen acting shocked, do give him or her a gentle slap on the wrist on my behalf.

Italy has been the problem adolescent of the European Union practically from day one. A chaotic, bewildering country, where no foreigner can make heads or tails of how things can ever be done. Yet, "Nietsche said that out of Chaos comes order". Magically, we could produce Ferraris, Fiats, Lamborghinis, ships, machinery, architecture, engineering... we were too bad to love yet too attractive to leave out. Sadly, we historically have one weak point: Government in all shape or form. 

What's missing from the debate about this "debt forgiveness" idiocy is how far back you need to go to see that it's a normal day at the office for an Italian dweller. And since my late father was one of the victims of that, let me tell you a story. 

in 1973, the then Italian government introduced a fancy new tax called ILOR, whose purpose was to finance local authorities, and whose tax base was rather Byzantine. Since Italy, for reasons that escape me, insists that it has something called a "Constitution", with the attendant court, somebody among the great unwashed dared say that parts of such tax violated that piece of paper. Some of these went on paying and at the same time going to court, my father among them, others simply avoided paying altogether. Lo and behold, in just seven years the court found that yes, Virginia, that tax violated the Constitution. But there was a fork in the road: obviously, those who had not paid were not asked to do so. But those who had... bad luck boys. This shop doesn't do returns.

So, by the 1980ies any self respecting international jurist should have warned all his/her clients looking at Italy that we had no principle where under the same circumstances, every individual could expect the same outcome under the law. In Italy, you are "path dependent". 

It goes without saying that, under any reasonable train of thought, that money was a "debt", and not only the government had been merrily saying that it would not pay it back all along, but the Judiciary introduced a further chaos by ensuring that it wasn't and that no  act of good faith should go unpunished.

But seriously, who was there in the 80ies? that's a dinosaur time frame, before the Earth cooled.

So bear with me and fast forward to 2008. Does the year sound familiar? good.

Amongst other turmoils of the Era, Oil was skyrocketing:

(source: Bloomberg LP)

 

That gave then Italian Finance minister the idea of introducing a special  tax hitting only  the oil industry, also introducing  a prohibition against raising prices in order to pass through the higher tax burden to consumers. 

Many of my friends would have recoiled in horror at that idea, but if that scares you, bear with me some more:

1. It was duly approved and instated;
2. Under Italian law, there is no suspension of tax, or payment into escrow accounts;
3. It was duly found unconstitutional a few years down the road.

But here lay another couple of rubs. between the institution of that tax and the sentence declaring it unconstitutional, Italy, at the behest of the European Union, had inserted in its constitution a clause demanding a substantial lack of deficit spending. REMEMBER, it was the EU that asked for it.

So, when in 2015, finally the court could postpone no longer, it finally said that it was an unconstitutional measure.... AND THAT MONEY PAID IN WOULD NOT BE RETURNED.

At that point, no one in Europe evidently had bothered to read Pareto or other basic economic theorists. The line had been drawn in the sand that if and when economic  circumstances change, and prices rise thereby signaling players that there is a supply/demand imbalance, Governments legally filch that profit that economic laws had set up to attract your investment. Of course, when the opposite happens you are on your own.  But, most importantly to my position about Italian politicians... the year was 2015, so no, this newfangled guys everybody tells you are plucked out of nowhere, do NOT come out of nowhere. They are simply competing for the best risk reward position in Italy (government), and they reap the rewards that others, even outside Italy, had sown. After all, I did not see the EU stomping on Italy saying that, as in the case of Hungary or Poland now, that was a wound to established principles and that unless parity at law was reestablished Italy would have lost EU contributions.

So, while, people have done an "all hands on deck" exercise to defuse words to the effect that Italy may or may not repay its debts, Italians live in a legal environment where it is possible ON PRECEDENT to impose a 90% wealth tax on people with surnames starting  from N to Z, having to pay it, and NEVER see that money back. "because the EU".

Yet, at the time, Berlusconi and Tremonti went, in favor of a "technocratic" government by Mr Monti. do you want to see what pushed them? 

(Italian 10 year government bond yield, source: Bloomberg LP)

Ahh, nothing says "we don't love you" more than a doubling of yields from 3,5% to over 7%. Hey Presto!, new government.

As you see from CURRENT yields, no one cared a whit about any politician's words about debt. they are not the ones buying it. On the contrary, see that spike earlier this year? THAT'S Mme. Lagarde saying that the ECB doesn't do spread tightening. BOOM!

So here's my take: my line in the sand regarding Italian political figures is that as long as they are mammals and don't have  nocturnal habits, we're fine. Just keep a keen eye on the printing presses at Frankfurt, that's where prices are decided.