Fisher Investments Editorial Staff
Geopolitics, Deficits, Developed Markets, Media Hype/Myths

Mediterranean Musical Chairs

By, 11/08/2011

The eurozone had a whirlwind weekend. So where did everything land?

Let’s start in Greece: Prime Minister George Papandreou won a confidence vote late Friday, but—counter-intuitively—that vote was predicated on his pledge to transition out as the PASOK (Socialist) party’s leader. Based on the vote’s outcome, a so-called “unity government” is on the way in.

This outcome shouldn’t be surprising given Papandreou’s waning power. Last week, he announced a referendum on the most recent bailout agreement, likely tantamount to a referendum on eurozone membership. Eurozone leaders protested. The opposition New Democracy Party called his bluff, saying they’d support the bailout in Parliament if Papandreou dropped the referendum and agreed to step down. Thus, it seems the Greek opposition has confidence in Papandreou so long as he isn’t PM. As to Papandreou, he “survived” Friday’s vote to walk away on his own terms. Now, an interim PM will likely lead a PASOK/New Democracy coalition charged with two tasks: approve the bailout and hold new elections.

In our view, this latest political scramble doesn’t much alter Greece’s course. All involved know Greece has but one viable option: Accept the agreed-on bailout and get the cash it needs. (Greece is waiting on its latest aid tranche of €8 billion, and the European Commission said Greek “political clarity” is a necessary precondition.) However, according to finance minister (and one of two rumored PM front runners) Evangelos Venizelos, Greece can pay the bills until December 15 without more cash, so clarity may not come overnight. And once the new cabinet coalesces, we wouldn’t be surprised by more dithering and gamesmanship—just because there’s a plan to pass the new bailout doesn’t mean everything suddenly gets settled or politicians change their stripes.

On to Italy: PM Silvio Berlusconi’s future is reportedly in jeopardy (though his political demise has been rumored numerous times—and he’s survived over 50 confidence votes since 2008). At issue is whether he can pass the spending and pension reforms demanded by eurozone officials and the IMF. Last week, officials announced Italy was under IMF surveillance to ensure implementation—Italy claims it’s just seeking IMF input, but that may not save Berlusconi.

It’s debatable how tenuous Silvio’s grasp is—one newspaper reported resignation was imminent, though he denied it and announced a confidence vote on austerity measures on Tuesday. But it’s uncertain whether he’ll get the 316 votes needed. So far, he’s been unable to raise the retirement age, three party members have defected in a week and several more are expected to rebel.

Meanwhile, Italian borrowing costs ticked up, and between higher yields (the 10-year hit 6.58% Monday) and political uncertainty, some posit Italy could be the next domino to fall. In our view, such fears are overwrought. Certainly Italy isn’t problem-free, but there are key distinctions between it and Greece. Yes, Italy has high outstanding debt, but that’s mostly a legacy from decades past, and the debt matures over the course of several years, not months. What’s more, today, Italy runs a primary surplus. While Greece remains mired in recession, Italy’s economy is growing, albeit slowly. Italy has also implemented substantial austerity measures already, and about €40 billion in state-owned assets are marked for sale. And Italy’s economy is more diverse than Greece’s with a broader tax base (or, at the very least, they’re far better at collecting tax revenue than Greece, where tax avoidance is an art).

In both nations, who’s in charge may affect the pace of austerity and reform implementation, but the general thrust of austerity seems likely to continue no matter who wins. Most in Italy’s Parliament understand the need for austerity, and if Teflon Silvio can’t push this through, President Napolitano will likely follow Greece’s path—task an interim government with passing austerity and scheduling early elections. Ultimately, the political gyrations ongoing in the eurozone seem set to continue—we’ve already had four nations’ leadership toppled (Ireland, Portugal, Spain and Slovakia) as a result of the saga. Greece marks five. And it wouldn’t be hugely surprising if Italy followed suit.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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