When the Italian government claims the right to decide its policy without obeying the bureaucrats from Brussels, it is applauded by all. However, it is not so simple: when someone is in debt, the power remains largely in his creditors’ hands. And the successive Italian governments, which allowed the accumulation of a debt of 2 trillion euros, do not escape this rule.
Everything suddenly becomes more difficult: the European Central Bank (“ECB”), which bought more than the amount of new debts issued by Italy every year has begun to reduce its purchase of bonds; and the Italian debt must now be financed in greater quantity by the private sector, which will not hesitate to raise interest rates because of the risks involved.
The situation will be worse at the end of the year: the ECB will completely halt its purchases of government bonds and the private sector alone will set the value of the loans of European countries.
In such case, how will Italy then find the 250 billion that she will need in 2019?
If we follow the Eurozone rules (that are now extremely strict and may only be modified by an unlikely unanimous agreement of all the Member States), Italy will have to depend on the private market for funding. And if Italy cannot do that, it can only get help from other European Member States and the ECB if it puts in place a very burdensome program to reduce its public debt.
Furthermore, if there is any doubt about Italy’s ability to make such an effort, interest rates will rise even higher; This will put the Italian banks in jeopardy, and fearing the risks looming on their deposits, Italian savers will cause a bank run (if I were Italian, I would be already thinking about it) and, by a self-fulfilling prophecy, will threaten the very existence of the Italian banking system.
To escape this disaster, Italian banks will then, according to the current rules, seek financing from their shareholders first, then from their creditors, and subsequently from their depositors. And if that is not enough, the EU rules state that a bank in such situation has to be liquidated.
Italian savers would then have to pay off the public debt with their deposits, and the country will collapse. It would lead to a major global crisis.
In fact, no other solution is possible. There will be no American, Russian, or Chinese funding. And doing as it does, the commission defends the interest of the Euro zone and the Italian people.
Thus, the Rome government would be wrong to believe that other Member States will panic and fund them unconditionally. Because it is impossible; the texts are clear: no European funding is possible without a plan to reduce the Italian debt.
This crisis can still be delayed; by thousand expedients, until the next European elections. Not much longer.
Moreover, other European Member States will break their solidarity with the Italians in order to avoid being dragged into the turmoil: after having done everything to convince the Italians to come to their senses and pay the debts accumulated by their elders, it will be with a heavy heart that Member States will cut all ties with Rome, one way or another. It will happen very soon.
The isolated Italian government could then try to finance its banks by issuing new public debt, which would be bought by its own banks, meaning the same banks that it would have previously financed. It would obviously be Monopoly money, driving Italy into the chaos experienced recently by Venezuela.
What catastrophic experience will it be necessary to go through in order to return to reasonable senses?
The impending crises, which I have announced more and more strongly, are not inevitable. It can be avoided by a frank and lucid dialogue with the Italians. By telling them their truths and by confronting ours.
I have no illusions: I will still be accused of excessive pessimism.
It is not new, and it is not just about me. More than two centuries ago, Nicolas de Chamfort said: “In France, those who set the fire are left alone, while those who sound the alarm are persecuted.”