Italy is in crisis module. Yields for 10y BTP above six percent. CDS price above 360 basis point.

HEADLINES
« I do not think we can get to a default.»
«Today the Financial Times has signed an obituary for prime -minister Berlusconi and Financial minister Tremonti.»
«The EFSF looks like a huge TARP. With a funding of €440 billion euro the EFSF cannot reassure markets.»

Fabrizio Goria

Interview by Jorge Nascimento Rodrigues, August 2, with Fabrizio Goria (Linkiesta)

Q: People talked about Spain as the next in line. But suddenly appears in the porcelain shop Italy. Why?
A: Italy has the third largest public debt in the world as a ratio of GDP, 120%, after Japan and Greece. This is enough to explain the markets appeal for us. In addition, the political leadership of Silvio Berlusconi is weaker. He has lost the last regional elections where Milan and Naples, two strongholds, have moved to the left. Besides this, Finance Minister Giulio Tremonti is involved in a rented house case in Rome. This house was paid by his advisor, Marco Milanese, who is under investigation. Milanese was an officer of the Guardia di Finanza, the Italian tax police, and he said he corrupted politicians and businessmen. There is much uncertainty about the future of Berlusconi and Tremonti. Today the Financial Times has signed an obituary for both. Then, there is the economic situation. On the 5th of August [next Thursday], will arrive the first estimate of Q2 GDP, below analysts forecasts. The Italian growth in last two decades is anemic and too much slow to be competitive in EU. Don’t forget the 1992 paradox.

Q: You can be more specific about the “Italian paradox” of 1992?
A: In 1992 there was Tangentopoli, a huge corruption scandal that destroyed the old Italian political class. So Silvio Berlusconi took power after an obscure period of political transition in which the growth was weak. George Soros’s move against the Bank of England has also weakened Italy. Rome has had to devalue the Lira and so the country restart, with many sacrifices by Italians. Italy has had to enact a budget of 90,000 billion lire with the government of Giuliano Amato, who has taxed the savings of the Italians.

Q: You think we can have during 2011-2012 a similar earthquake in Italian politics like in 1992?
A: Absolutely yes. Tremonti and Berlusconi have finished their political life.

Q: Italy has a different public debt profile from Greece, Portugal or Ireland. The majority of bondholders are “domestic”. Italy risks a domestic default?
A: According to Morgan Stanley, 56% of the Italian debt is in the hands of residents, about 787 billion euros. Italian banks are under pressure because of the debt in their portfolios, which is suffering mark to market write-downs. I do not think we can get to a default. Italy is too big to bail, there is no interest in bringing down one of the founding countries of the European Union.

Q: The July 21st summit is dead?
A: The European Council summit has not calmed investors. He had to do it, but did not do it. Greece has had a new bailout because Germany would not pay the bill for the EU. The contagion in Spain and Italy is still an issue. Europe has missed an opportunity to be more united. France and Germany have decided to save all their banks and have divided Europe between core countries and periphery countries. Do not forget that French banks are exposed to Greece for €64bn and German banks for €40bn, according to BIS data. Berlin and Paris have a lot of interest to save Greece, especially for their banking stability. The problem is that Greece is in default and Europe has no mechanisms for crisis management. Mr. Trichet did well in monetary policy after August 2007 turmoil and after Lehman Brothers collapse, but he is not alone in the decision process. In the Euzone there are 17 countries with 17 different interests. Put all to agree is not easy and only the strongest takes the command, who decide for everyone else. An example? France and Germany.

Q: The flexible new framework from the EFSF is sufficient?
A: No. For what I’ve seen, the EFSF looks like a huge TARP. With a funding of €440 billion euro the EFSF cannot reassure markets. I guess it must be recapitalized, probably with €2 trillion as Willem Buiter (Citi’s chief economist) says on today’s FT. Europe is only at the beginning of the worst crisis of its existence. You cannot predict anything, we can only hope that it will be less harsh as possible.

Fabrizio Goria is a 27 year financial reporter for Linkiesta, a new online Italian newspaper (based in Milan and Rome) established also by former UniCredit CEO Alessandro Profumo and a lot of Italian entrepreneurs, bankers and lawyers. In November 2008 he began to collaborate with Il Riformista, an Italian political newspaper, where he also helps with the economic desk. In October 2009 he became a trainee journalist for Il Riformista. He also writes for Il Sole 24 Ore, the main Italian financial newspaper, on Sunday edition. He is the Italian correspondent for Turkish Radio & Television, the main Turkish broadcast. Born in Turin, he holds a BA degree in Administrative Sciences from the University of Turin.