Thursday, March 28, 2013

Italy not Cyprus might be a real problem

Forget Cyprus: Why you should really be worrying about Italy
After securing a bailout, Cyprus reopens its banks. But Europe's next crisis might be even worse
Look familiar? Silvio Berlusconi rallies his supporters in Rome on March 23.
Look familiar? Silvio Berlusconi rallies his supporters in Rome on March 23.
AP Photo/Andrew Medichini
ypriots are calmly lining up to get cash out of their banks, which are reopening Thursday after being closed for two weeks as Cyprus' government negotiated a $13 billion bailout with Europe. Cyprus imposed restrictions — including a $380 daily limit on withdrawals — to prevent a bank run, and the markets have avoided panic, even as the tiny Mediterranean tax haven flirted with financial collapse. But the terms of the bailout, which imposes losses on people with big bank accounts to help pay for the rescue, are still unnerving investors in other eurozone countries, particularly Italy, where political instability threatens to undermine the government's attempts to confront the country's debt crisis.

Indeed, now that things are calming down in Cyprus, says Matthew Yglesias at Slate, it's time to focus attention "back on the real problem with the eurozone. Italy." The European Central Bank first hoped to replace the "creepy" business tycoon Silvio Berlusconi with a "'normal' center-right political movement," headed by technocrat Mario Monti, that would push for small-government policies and get the country's finances in order. That didn't work, and now the winner of recent elections is declaring the divided nation ungovernable. Investors, meanwhile, are demanding higher yields to invest in the country's bonds, and there's no hope for a solution in sight.
Democratic Party leader Pier Luigi Bersani confirmed that there's no coalition that can secure majority support in the upper house of parliament. Not only does that mean political deadlock, it's far from clear that a new election will fix it. The basic issue is that Bersani's Democrats, Silvio Berlusconi's People of Freedom, and Beppe Grillo's Five Star Movement all have large bases of support and none of those parties wants to work with any of the others. [Slate]
Bersani is expected to report back to President Giorgio Napolitano on his latest attempt to form a government Thursday evening, but "prospects for a breakthrough appear bleak," says William L. Watts at MarketWatch. Bersani's alliance won a majority in the lower house of parliament in last month's elections, but he declared on Wednesday that only an "insane person" would want to run the country these days, with vicious infighting over whether to attack the country's debts with painful austerity measures or seek ways to boost the economy first.
Bersani has been reluctant to strike a coalition deal with Silvio Berlusconi's center-right alliance and has been repeatedly rebuffed in attempts to win support for a minority government from former comedian Beppe Grillo’s anti-euro Five-Star Movement.

If Bersani manages to make a last-minute deal, traders may fear that any resulting government is fragile. If he fails, they will weigh prospects for another short-term technocratic government or a fresh round of elections. [MarketWatch]
Not everybody is focused on Italy, though. Maybe Malta will be next, says Guy Verhoftstadt in The New York Times. It has "an even bigger banking sector than Cyprus, relative to GDP." Or maybe a relative powerhouse like Spain will need a bailout. "The inconvenient truth for eurozone leaders is that we will never emerge from this state of crisis until a fully functioning banking union is put into place." And by raiding the accounts of rich depositors under the bailout in Cyprus, the EU has set a dangerous precedent that has destroyed many people's faith in the system. That raises "the specter of future runs on banks" across the eurozone as depositors worry what will happen if their nation is the next to need rescue.
We are no longer simply facing a debt crisis, concerned only with market confidence or the views of credit rating agencies. At stake is the trust of ordinary E.U. citizens in the European project as a whole. Unless steps are taken to restore this trust, we risk seeing the disintegration of the eurozone and the European Union as we know it. [New York Times

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