On Nov 9th 2011 the world media reported the breaking news: the Italian Prime Minister Silvio Berlusconi is going to resign. On Nov 8th the Italian parliament passed the austerity reforms demanded by the EU. While 308 parliamentarians voted in support of the budget measures and none voted against it, some 321 abstained from voting, which meant the end of Berlusconi's power.
Right after the voting Silvio Berlusconi visited President Gorgio Napolitano’s residence. Napolitano’s office said Berlusconi had promised during the meeting to resign once the parliament passes the austerity measures. It will take a couple of weeks to consider and approve the measures so Berlusconi will stay in office until late November – early December. What will be the consequences of Berlusconi’s resignation?
Market decline – trend or retracement?
Whatever Italian mass media and politicians say about Berlusconi, he is a prominent figure in the contemporary history of Italy. Over the last 17 years he has been elected Prime Minister for 3 times (10 years in office). Only Benito Mussolini stayed in power longer than Silvio Berlusconi.
Who will succeed Berlusconi? The contemporary history shows that prominent figures are succeeded by mousy persons.
The experts of have analyzed the situation to find out what Berlusconi did to prevent the default of Italy and what he will leave to his successor.
What will Berlusconi leave to his successor?
· Italy’s huge public debt - € 1,9 trillion – 120% of the GDP, one of the Europe’s biggest debts.
· Very low economic performance: +0.2% a year over the last decade while the eurozone’s average performance is +1.1% a year.
· The 10-year bond yield has recently exceeded the 7% limit.
· Italy spends € 260–270B a year to service its debt ( Rome will have to spend € 50B in Nov and € 60 in Dec)
· Italy’s budget deficit is 3.9%.
According to the experts of , in order to stabilize the economic situation Italy needs € 1 trillion, which is the entire volume of the EFSF. However, there are Greece, Portugal and Ireland. They also need some financial support. Germany advises Italy that it should sell its gold reserves. However, Italy’s gold reserves are estimated at no more than € 200B. Of course, the authorities have plenty of l assets to sell but it will take a lot of time to do that.
How serious was Berlusconi’s struggle with the crisis?
Silvio Berlusconi deliberately denied external financial aid as he believed the country had enough reserves to prevent a default. The austerity plan approved by the government testifies to Italy’s potential:
· It is planned to cut the budget spending by € 20B in 2012 (and by € 25.5B in 2013)
· It is planned to reduce the budget deficit to 1.6%in 2012 (and to reach the non-deficit level in 2013)
· A cut in spending on local authorities, the elimination of over 30 provinces and the merge of over 1500 places to reduce the administrative spending of local authorities.
· An investment tax hike from 12.5% up to 20%.
· The introduction of a new “solidarity tax” (5% if the annual income is over € 90K and 10% if the annual income is over € 150K).
· A pension reform (an increase in the retirement age for women up to 65 years).
· Privatization of state-owned assets etc.
According to the experts of , there will be no spending cuts for education, healthcare and research.
Italy’s default – the end of the eurozone?
According to the analytic team of ICM Brokers, Berlusconi’s resignation means the start of a political crisis:
When Berlusconi leaves his office, the ruling coalition (which has recently split) is unlikely to unite again, which means Italy will face early parliamentary elections, with politicians forgetting about austerity. Yet, Italy is 12% of the eurozone’s GDP, unlike Greece’s 2%.
The analysts of Credit Suisse say Italy will default within 100 days. If Italy does default, France will get in trouble as French banks are the biggest holders of Italian bonds. In this case the eurozone and its common currency will find themselves, so to say, “on the verge of extinction”.
According to the analysts of , the EU has to support Greece, Portugal , Ireland as their bond yields has reached 7%. Some experts say that the eurozone debt crisis has already grown into a political crisis.
Amid Berlusconi’s promise to resign, the Greek authorities have been discussing the composition of the Cabinet of Ministers for the 3rd day in a row. However, there’s been no progress so far.
In the meantime, the experts of the DFWA Department of point out the increased volatility of the common European currency. The Italian problem has led to an overall market collapse. There probably won’t be any cardinal changes in the overall market situation as investors are turning more risk-averse. The eurozone’s domestic currency market is expected to stay rather volatile. However, if the eurozone authorities take some urgent and effective steps, the markets may recover a little, thus making Euro and some other currencies stronger.
Market Leader and would appreciate if you could participate in a survey. Please, visit the Academy’s forum for traders and investors and answer the following question:
How will Berlusconi’s resignation affect the overall situation in Italy and the eurozone?
