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Sicily on the Edge of Default: Will “Italian Greece” be Followed by Other Regions of Europe?

09 August 04:13 PM

Sicily appeared on the edge of bankruptcy. On July 18 Prime Minister of Italy Mario Monti made a statement about his “great concern” of possible bankruptcy in Sicily, demanding the head of state Raffaele Lombardo to prove his previously announced decision to quit the post by the end of the month.

Possible default of the whole region will now be added to the numerous problems of Italian economy (one of the ailing ones in Europe). Has Eurozone started falling to pieces from within while Brussels, Paris, and Berlin are thinking about the ways to rescue the depressive economies of entire countries, some of which are already in half-decay? What can Sicilian problems result in for Italy in particular and European Union in general, is it the start of new dangerous trend?

SmallIslandwithBigProblems

The peculiarity of present situation is the fact that Sicily has the status of autonomous district as a part of Italy and, unlike other regions of the republic, is more financially independent than ordinary provinces. Formally, the state does not take part in financial affairs of the island, cannot control expenditure of local government; however, it constantly allocates its budget. The head of Sicily is called differently, among which the Governor or even the President. This is an elected post, which is rather independent from the official Rome. Therefore, Prime Minister of Italy cannot dismiss him; at most he can recommend his voluntary resignation. And that is exactly what has happened, having slightly shocked not only Sicily, but the whole Italy.
- the problem is that Sicily has accumulated an enormous debt, which it is unable to pay. Independent specialists from Corte dei Conti have previously defined the debt of Sicily to amount to over 5 bln. euro at the end of 2011. It is evident that it has increased in 2012, but it is hard to say how much, as information is very controversial. According to Reuters agency, the debt of the island has currently reached about 5.3 bln. euro, and its annual service costs about 500–600 mln. euro.
- shortage of funding from Rome is supposed to be the main reason of the unprecedented growth of Sicilian debt. This has resulted from the increase of Italian national debt, which has currently reached 1.95 trn. euro. Sicily, just as the whole south, greatly falls behind industrially developed northern regions, which makes it the major problem of the country. Its economy mostly survives owing to agriculture and tourism, which currently lacks. The problem is worsened by traditional unemployment at the south of Italy. Sicily makes up about 5.5% of the country’s GDP, whereas its unemployment rate amounts to 19.5%, which is twice higher than the country’s average. Officials of the autonomous district make up to 17 995 people, 1 385 of whom occupy various leading positions in the government. Despite the financial hardship, last year the number of officials has risen by over 30%. This is much more than the national trend. It reminds notorious Sicilian mafia.

What may Default of Sicily Mean for Italy?

The consequences of possible default of Italian autonomous district may be very sad for the country. In combination with other problems, this one may literally become fatal.

1. International rating agency Moody’s has recently lowered the rating of Italian government bonds by two points – from “A3” to “Baa2”, followed by negative prediction. This has been the way for the agency’s experts to express their doubt that the country may overcome its financial difficulties in the nearest future. These days international agency Fitch has set the country’s rating at point “А-” with negative prediction. Let us remind that Italy, similar to Greece, Portugal , Spain , and Ireland, is on the edge of being excluded from Eurozone. Italian national debt currently amounts to 120% of the country’s GDP, and its economy is facing the 4^th recession in the last decade.

2. This has been followed by another hit – ratings of 13 Italian banks have been lowered. Moody’s agency has lowered the long-term rating of such leading organizations as UniCredit and Intesa Sanpaolo by two levels, from А3 to Ваа2. The forecast has certainly proved to be negative, as Italian government is highly unlikely to be able to help these banks financially.

3. Due to higher cost of foreign borrowings the markets of foreign capital may in mid-term perspective be closed for the country.

4. If Italian government is obliged to pay off the debt of Sicily from the central budget, investors will become even more skeptical about the country. Possible default of Sicily will cast doubt on the great effort of the Premier Mario Monti to regain trust to Italian economy. In July the government of Mario Monti adopted the program on reduction of expenses by 26 bln. euro in three years. Now, after unpromising news from Sicily, there will appear serious doubt about reality of such plans. Foreign investors are yet ready to buy Italian bonds. Bonds amounting to 3.5 bln. euro have been sold during the last auction, 54% of them have been bought by foreigners.

The Prime Minister of Italy Mario Monti and the President of Sicily Raffaele Lombardo are supposed to meet in order to discuss the financial condition of the region. Time will show what results from this, but at this point some Sicilian politicians claim that the position of Rome is “breaking the fundamental rule of the regions’ independence and democracy”. We will see if Italy manages to fight new crisis, but if the country’s economy falls into recession, this will certainly happen because of the shiny Sicily.

What Other European Countries have Depressed Regions?

The situation with Sicily is intricate mostly because of its autonomous status, as there is almost no fiscal control over the government expenses from the center. As a result, news about possible default of Sicily became a bolt from the blue for Rome. The situation is very similar to Greece four years ago. This is why Sicily is now called “Italian Greece”. Therefore, such unpleasant surprises may happen not only in federations, but in unitary states too, as separate depressed regions can make the general economic situation much worse. So, imbalance in regions of the country brings no good to the general welfare.

Gross Regional Product (GRP) is the main indicator of economic development of the region. It shows total economic activity in the region, which is divided into total number of population. In most successful regions of the EU GRP is more than 100% high than average European rate, as stated by Andrei Goilov, the head of Analytics Department of RoboForex (forex market leader by trading with advisors):

1. First position belongs to London with GRP amounting to 303% of average in the EU.

2. First position belongs to Luxembourg with the rate of 251% of average GRP per EU citizen.

3. First position belongs to Brussels with GRP rate that amounts to 248% of average in the EU.

4. Fourth, fifth, and sixth positions belong to Hamburg, Vienna, and Paris accordingly.

5. The volume of GRP that exceeds average by 125% has been found only in 46 European regions out of 268. Eight such regions have been found in Britain, eight – in Germany, seven – in Italy, five – in the Netherlands, four – in Austria, three – in Belgium and Spain , two – in Finland, and one in each of such countries as Greece, Ireland, France, Slovakia, and Sweden . These are the richest regions of European countries.

6. The number of most depressed regions of Europe (GRP is 75% less than the average) amount to about 70 (!). 15 of them are found in Poland, by 8 – in Greece and Romania, 7 – in the Czech Republic, by 6 – in Bulgaria and Hungary, by 4 – in France, Italy, and Portugal , 3 – in Slovakia, by 1 – in Spain , Estonia, Latvia, Lithuania, and Malta. In three Bulgarian provinces GRP amounts to only 26% of average European rate, and in north-west of Romania the rate is even smaller – only 24%. Therefore, surprises similar to Sicilian may be expected from many countries of EU.

How Much will EURUSD Fall due to New Problems in EU?

According to the specialists of the System of Early Prediction Sub-department of Masterforex-V Academy, EURUSD is forming h1 wave B at Forex market. Impulse nature of the motion that started from h4 wave C is to be kept in order for the downtrend to continue. When h1 wave B is over, the price will drop further. Meanwhile, 1.2002 will be the closest important target.

график

The “Market Leader” and Masterforex-V Academy hold a questionnaire at forex forum for traders and investors: in your opinion, can Sicilian problem become topical for other European countries?

· yes, but only for federations.

· no, Italy will easily handle it.

· Sicily is a unique case.

You are free to discuss this article here: forum for traders and investors

Got a question? – Ask it here »

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