Euro in Crisis: Is the Italian Domino Falling?

From: The Atlantic

There have been some rumbles about Italy for a while. Italy's budget deficits are relatively modest compared to, say, Ireland, but their debt is about 120% of GDP. The government has passed a plan that will balance the budget by 2014, but as with most such plans, most of the cutting comes later, while the current cuts are small.

This may well be sensible fiscal policy, given the current economic climate, but it is not reassuring to the markets. Mike Shedlock estimates that Italy needs to borrow about €356 billion ($500 billion) in 2011 to cover its deficit, and roll over outstanding debt. Their 10-years are now trading at something north of 5%.

Most of the estimates I've seen say that a debt death spiral becomes likely when rates hit somewhere between 6-7%, because the debt service costs start blowing up the budget deficits.

If Italy goes, it's not clear that the rest of Europe can save them. In the FT, Neil Dennis says people are talking about doubling the euro bailout fund to €1.5 trillion--or about three times the size of TARP. And you may have noticed that the bailout fund has not actually stopped Greece's descent into debt madness. Italy's public debt is not much smaller than Germany's, even though the latter obviously has a much bigger (and richer) economy. In the event that things really go south on the Italian peninsula, I don't think there's enough money in the rest of Europe to provide a rescue package.

Meanwhile, conditions in the other PIIGSs are worsening. European leaders seem to be giving up on the notion of some sort of voluntary debt swap after the ratings agencies noted that they would be forced to call this what it is: a default. Since the Greek debt load does not seem to be in any way sustainable, they're going to have to do something. Riots in Athens seem to be making it increasingly clear that over the long term, "something" is not going to be indefinitely decreasing their government consumption in order to make debt service payments. That leaves making bondholders take some sort of a haircut, aka default. It sounds as if the continent's financial leaders are starting to decide that if Greece's only option is some kind of default, they might as well bite the bullet and do the thing.

This will not be pretty. For starters, if they default, but stay in the euro, then unless really considerable aid is forthcoming from the rest of Europe, they're going to lose most of the advantages of the euro (low debt premium) while retaining the disadvantages (excessively tight monetary policy for a country that is going to be experiencing capital flight and even deeper recession). Countries like Argentina got at least some tourism and export boost from very cheap prices after they defaulted and went off their currency peg; Greece won't even get that if the euro remains at an ouchy 1.4 to the dollar. (If it doesn't remain there, but instead sinks . . . well, that means the euro zone will be having all sorts of other problems. More on which in a minute.)

Of course, even defaulting and going off the peg is hardly a gateway to paradise. It is true that after an initial period of horrifying double-digit contraction, Argentina boomed . . . but Argentina was an agricultural commodity exporter in an era when soaring Chinese demand was causing rapidly rising prices in many commodity markets. And after playing hardball with their foreign investors, Argentina has had limited access to global capital markets, which means they've had to resort to some desperate measures, like seizing the Argentinian equivalent of 401ks, and running the printing presses, to keep the government's finances in balance. This weekend, the Wall Street Journal informed me that Argentina has now resorted to filing criminal charges against economic consulting firms whose reports indicate that actual inflation exceeds the officially reported numbers by a factor of two to three.

Either way, what Greece does will have implications for the rest of Europe--and for us. As NPR's Jacob Goldstein says, interbank lending between various European nations, and the US, "looks like a web made by an insane spider".

Italian Scientists to Stand Trial for Manslaughter for Earthquake

From: ScienceInsider

Enzo Boschi, the president of Italy's National Institute of Geophysics and Volcanology (INGV), will face trial on charges of manslaughter with six other scientists and technicians for failing to alert the residents of L'Aquila ahead of the devastating earthquake that struck the central Italian town on 6 April 2009, killing 308 people.

The seven experts sit on the nation's major risks committee, and were probed by L'Aquila prosecutors after members of the public complained that it was the committee's reassurances that persuaded them not to leave their homes ahead of the quake.

In addition to Boschi, those facing trial are: Franco Barberi, committee vice president; Bernardo De Bernardinis, at the time vice president of Italy's Civil Protection Department and now president of the country's Institute for Environmental Protection and Research; Giulio Selvaggi, director of the National Earthquake Centre; Gian Michele Calvi, director of the European Centre for Training and Research in Earthquake Engineering; Claudio Eva, an earth scientist at the University of Genoa; and Mauro Dolce, director of the office of seismic risk at the Civil Protection Department.

The seven were placed under investigation almost a year ago, and today L'Aquila Judge Giuseppe Romano Gargarella announced that they will be tried. According to the Italian daily Corriere della Sera, Gargarella said that the seven defendants had supplied "imprecise, incomplete and contradictory information," in a press conference following a meeting held by the committee 6 days before the quake. In doing so, they "thwarted the activities designed to protect the public," the judge said.

During the meeting on 31 March 2009—which also included other researchers from the INGV, city officials and representatives of the Civil Protection Department—committee vice chair Barberi, one of the seven to be tried, said there were no grounds for thinking that a major quake was imminent, even though the area around the town had been experiencing a series of smaller tremors in the previous months. In the press briefing afterward, prosecutors say, the commission made statements that gave the town's people a false sense of security.

Boschi's lawyer, Marcello Melandri, tells ScienceInsider that Boschi has taken the judge's decision very badly and that the defendants had never expected that the case would actually go to court. Melandri insists that Boschi never sought to reassure the population of L'Aquila that there was no threat. On the contrary, the INGV head made it clear that "at some point it is probable that there will be a big earthquake" in the Abruzzo region, of which L'Aquila is the capital, he says.

Melandri says the trial, scheduled to start on 20 September, could take anywhere between 6 months and 2 years.