Tuesday, February 12, 2019

Thoughts from Galicia, Spain: 12.2.19

Spanish life is not always likeable but it is compellingly loveable.
                                                         Christopher Howse: A Pilgrim in Spain

  • The minority PSOE government is still having problems getting its 2019 budget passed. So an early election is being considered, it says here.
  • Spanish (tribal) politics at their most intense, here.
  • More on our geriatric vandal here.
  • Such is the ambient noise level in Spain - something which rather contrasts with nearby Portugal -  it’s sometimes hard to tell - when I’m taking a tiffin on a terrace - that there’s a demonstration or protest taking place on the other side of the square.
  • Says Wiki: Galicia has a concentrated farm population living on intensely fragmented plots. These are called minifundios and a local paper has recently reported that Galicia's system of minifundismo genĂ©tico - tiny plots - is unique in the world. It doesn't help the economy, of course. But nothing will/can be done about it. As with the 3 uneconomic airports.
The EU 
  • Ireland: I saw an interesting article suggesting that the EU - having protected Ireland from the depredations of the nasty Brexit British - will soon be going after the Irish because they are gorrones fiscales - or fiscal spongers/freeloaders. This is because the corporation tax there is only 12.5%, against an EU average of 24%
  • Italy 1: This is an interesting article on the spat with France, from an Italian political analyst. Looking backwards, he says the 2 countries are effectively washing the EU's dirty linen in public, something usually 'forbidden'. Looking ahead, he argues that this is a harbinger of how politics will be transacted within the empire. Which, he avers, will benefit from it.
  • Italy 2: See the Ambrose Evan Pritchard article below, in which he claims that some folk there are exploring a bilateral deal with the UK, to mitigate the impact of the Brexit on an economy which is already in the intensive care unit.
The UK and Brexit 
  • Richard North today: There is possibly only one person in the world who knows what Mrs May intends to do – and that's Mrs May. But it is just as possible that she herself doesn't know what she's doing – or has simply run out options. . . . That said, if I was forced to put money on the outcome, it would be the no-deal scenario – occasioned simply because Mrs May had failed to get the Withdrawal Agreement ratified, and parliament didn't have the wit to call a halt to the madness into which we're descending.  . . . Meanwhile we get endless prattle from the media about parliament introducing a motion to "block" a no-deal, a move which – if pursued – will indicate that parliament has failed to understand the limits of its own power, alongside the media's inability to appreciate the finer points of our constitution. As it stands, no-deal remains the default under Article 50, leaving open only three possibilities if it is to be prevented from taking effect automatically on 29 March. But  there is only one certain way to avoid a hard deal, and that is for parliament to ratify the Withdrawal Agreement when (of if) it is again submitted to a vote.
The UK
  • Apparently, the utterly hapless Jeremy Corbyn, having finally come out of the long grass on Brexit, has managed to seriously annoy all the constituent elements of the barely-held-together Labour Party:-
  1. The Far Left - Momentum et al.
  2. Labour Brexiteers
  3. Labour Remainers
  4. Moderate, 'centre-left' MPs, and
  5. Those party members and voters who want a second referendum.
And then there's his long-standing, unchanged views on Venezuela and its dictators. Is it any wonder that, in the polls, Labour still lags far behind the most incompetent British Conservative government in living memory? Mrs May surely can't believe her luck at having JC as leader of the Opposition. Of course, several of us predicted that he'd be a disastrous leader. In truth, this wasn't exactly difficult. Or clever.

Finally . . .
  • I see that Bill Davis, journalist and ex-editor of Punch - has passed away. I met him once, in Tehran airport, after Iranair had given each of us the other's boarding pass. Nice guy, though he did accuse me of taking my Iranian secretary - actually my English wife - to the UK for a dirty weekend. Despite having a first class seat, he spent most of the flight in Economy, standing in the aisle and sharing the slightly hysterical laughter of those of us who were a bit stir-crazy, after waiting in the terminal for many hours because of a snow storm. As I recall, he was a tad worried about his caviar going off and very sceptical when I told him you could freeze the stuff. Probably quite rightly, for I later asked someone at Harrods and they were horrified at the very thought. I see that he wanted his epitaph to be: “He was fun.” Very commendable. Something else we've shared. But still a memento mori.

Italy explores its own bilateral Brexit deal with Britain as its economic crisis nears danger level:  Ambrose Evans-Pritchard

Italy is drawing up emergency plans to safeguard financial stability and keep trade with the UK flowing even if there is a no-deal Brexit, if necessary through a bilateral deal between Rome and London.

The country’s insurgent Lega-Five Star coalition is increasingly worried that a mishandling of the EU’s Brexit crisis could push Italy's fragile economy into a dangerous downward slide and risk a funding crisis for its sovereign debt at a treacherous moment.

Premier Giuseppe Conte has told his Brexit Task Force to focus urgently on ports, airports, customs, and the handling of food trade, as well as the status of Italians living in the UK.

Palazzo Chigi, the prime minister’s inner machine, is exploring what Italy can do under its own authority to defuse the stand-off with Britain.  While this is relatively straightforward for issues such as citizens’ rights, it is unclear how it would work in trade and finance where the EU sets the rules.    

Both the Lega and Five Star movement have Eurosceptic roots and are irked by the Brexit strategy of the European Commission, seen as rigid, ideological, and potentially explosive.

“We want the closest possible bilateral ties with the UK and certainly don’t agree with any idea of punishment. You are our customer,” said Claudio Borghi, the Lega’s economics spokesman and chairman of the budget committee in parliament.

“Unfortunately we are not in charge of Europe, at least not yet,” he said.

It is a perilous time for Italy. The economy is in a protracted recession. Risk spreads on its 10-year bonds are again nearing the threshold of 300 basis points, the level where trouble has begun in the past.

The country’s financial system depends on the City of London for global funding of its bond markets. “Great Britain is in a sense Europe’s investment banker,” said Confindustria, Italy’s business federation.

While direct trade exposure to the UK is modest, this is highly misleading. The Milan-Turin industrial hub in North Italy is intimately intertwined with car plants and engineering companies in Germany that do feed the British market.

Ettore Prandini, the head of Italy’s agro-industrial federation Coldiretti, said there were fears that a hard Brexit could devastate Italy’s long-established food exports to Britain. The UK is the country’s third biggest market for food products after Germany and the US.

“It is absolutely vital that we get a good accord. We have made big investments in the distribution network in the UK,” he said.

Italy’s food and drinks sector is already in crisis. Sales of fruit and vegetables have dropped 12% over the last year due to cut-throat global competition.

“What worries us about Brexit is that exporters in the rest of the world will come in and undercut us. This is what happened after the Russia sanctions in 2014. The Turks grabbed our market share,” he said.

Coldiretti is concerned that suppliers in places such as South Africa, Kenya, or parts of Latin America will suddenly gain an edge in UK supermarkets.

If the UK were to opt for unilateral free trade to keep ports open in a no-deal scenario - as has been floated by Trade Secretary Liam Fox, at least as a temporary measure - it might lead to an irreversible loss of UK market share for Europe’s high-cost producers.

A confidential study by the pan-EU lobby FoodDrinkEurope estimates that Italy could see a 33% drop in wine sales in Britain in a hard Brexit.

The body said annual EU exports of food and drinks to the UK are €41bn, against €17bn flowing in the opposite direction. “The exit of the UK from the EU without a deal will constitute a lose-lose situation for the entire agri-food chain. The impact will be immediate and harsh,” it said.

It called on the Commission to prepare “unilateral contingency measures”, with light-touch customs clearance for up to 24 months, mutual recognition of certifications, and continued acceptance of licences for hauliers until the mess is sorted out.

Mr Prandini said he had been to see the president of the European Parliament, Antonio Tajani, to plead for a resolution of the Brexit deadlock.

“Tajani promised to do his best but the matter was beyond his control. He told me ‘it’s Juncker who is in charge of everything’,” he said, referring to commission chief Jean-Claude Juncker.

Italy’s total exports to the UK are €23bn annually. This is heavily tilted in favour of Italian producers. The bilateral surplus is over €10bn.

Confindustria said Italy could have trouble placing its debt if financial ties with London are damaged. “The risk is that financing costs will go up. Banks in the City have up to now been responsible for the rump of European debt sales,” it said.

The City is the principle conduit for global funds willing to buy riskier peripheral EMU debt. This is a comprehensive package not always understood by European politicians.

The City’s ecosystem offers investors derivative instruments for hedging the currency risk, interest rate risk, and insolvency risk, (through credit default swaps, etc) when buying Italian debt. These hedges are a sine qua non for Asian institutions, insurers, and wealth funds calculating fine margins on huge sums of capital.

If these services suddenly become less accessible at the end of March, Italy faces the higher likelihood of a ‘roll over squeeze’ and rising borrowing costs. The country has to fund €400bn of debt this year, mostly in the form of medium or long-term bonds.

The European Central Bank has been soaking up the entire net issuance of the Italian treasury for most of the last three years through quantitative easing. This programme was shut down in December. Italy is suddenly nakedly exposed to market forces.

The London Stock Exchange is moving 20% of its MTS Cash trading business to Milan in preparation for Brexit. This goes only so far in securing inflows of global capital.

Italy is disturbingly close to a fresh crisis. The prospect of recession lasting deep into 2019 has blown apart the budget deficit targets agreed with Brussels in November.  The country’s knife-edge debt dynamics are coming into sharper focus.

The social policies of the Lega-Five Star alliance - a universal basic income and a roll-back of pension reforms - will in any case cause a structural deterioration in the fiscal profile into the 2020s.

Rating agencies have yet to issue verdicts. Fitch Ratings will rule on February 22 and Standard & Poor’s on April 26. Both have negative watch positions and are likely to follow Moody’s in downgrading Italy to one notch above junk. That is a thin safety margin in recessionary conditions.

Investors may start to anticipate higher haircuts on collateral for banks. Italian lenders hold roughly €360bn of Italian sovereign debt. The International Monetary Fund said that every 100 rise in Italy’s 10-year bond yield erodes the banks’ core capital ratios by 40 points. This becomes a vicious circle, the doom-loop in EU parlance.

“With the deficit and the spreads so high, all it takes is a spark from the outside, however modest, and a crisis becomes all too probable,” said Carlo Cottarelli, the 7head of Italy’s independent spending review.

Italian industrial data released on Friday showed that output collapsed by 5.5% in December from a year earlier. This is the worst drop since the EMU banking crisis.

Every sector contracted: printing fell 13%; clothes, leather, and accessories fell 11.1%; plastics fell 7.9%; electrical equipment fell 6.4%; manufacturing, transport equipment, and metals fell 5.5%

Unemployment is inevitably creeping up again with a lag. The youth jobless rate has risen to 31.9% (Sicily 58%) or 15.7% for prime aged workers aged 25-34 (Sicily 50%).

A developed economy with full sovereign policy instruments in such a downturn would typically launch a fiscal stimulus of ‘shovel-ready’ infrastructure and investment projects worth 1% to 2% of GDP. It would restart quantitative easing. It would engineer a sharp slide in the currency. All three together would right the ship.

Italy can do none of these things within the constraints of the euro. It is essentially defenceless.

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