Aurelia Butler

FRANKFURT/ROME (Reuters) – Ten years after Mario Draghi’s “whatever it takes” pledge saved the euro, Italy is once again in the middle of a debt crisis – but the country’s prime minister and former head of the European Central Bank may struggle to solve this one. Just like a decade ago, investors are questioning whether some euro zone countries can continue to roll over their public debts, which have ballooned during the pandemic and are becoming more expensive to refinance as the ECB prepares to raise interest rates.This time, however, the epicentre of the crisis is Italy’s secular lack of economic growth, rather than the financial excesses that landed Greece, Portugal, Ireland and Spain in trouble 10 years ago.The situation for Italy has just become a lot more unstable.Draghi offered to resign on Thursday after one of the parties in his fractious coalition refused to back him in a confidence vote, only to have his resignation rejected by the head of state. Draghi is due to address parliament on Wednesday with his future still in the balance.Italy’s benchmark 10-year yield rose to a high of 3.5% on Thursday and the spread over safer German Bunds widened to 227 points by the close, having more than doubled since the start of the year.”Things just got worse; how much worse is difficult to tell,” said Dirk Schumacher, an economist at Natixis. Draghi, 74, dubbed “Super Mario” due to his long career as a financial problem solver, has seen Italian borrowing costs rise during his 17-month premiership, something he acknowledged at a news conference two months ago.”This shows I’m not a shield against all events. I’m a human being, and so things happen,” he told reporters. The deeper issue is that Italy is big enough to bring down the rest of the euro zone periphery as its 2.5 trillion euro ($2.52 trillion) government debt pile is larger than those of the other four countries combined and too big for a bailout. Ten years ago, the then ECB president restored market calm by saying the ECB would do “whatever it takes” to save the euro – code for buying the bonds of troubled countries.His words on July 26, 2012, reverberate to this day, keeping markets relatively calm on the expectation the ECB will once again put a lid on borrowing costs, including via a new bond-buying scheme now in the works.But this is only likely to be another stop-gap solution as investors are bound to test the ECB’s resolve for as long as Italy does not convince them it can stand on its own two feet. “The real problem is that Italy has been a growth underperformer for two decades,” Moritz Kraemer, chief economist at LBBW, said. “And the fiscal situation is not the cause, it’s the consequence of that weakness.” (Graphic: Italy is too big to fail and hasn’t grown for 20 years: https://fingfx.thomsonreuters.com/gfx/mkt/zjvqkzwnqvx/Italy%20is%20too%20big%20to%20fail%20and%20has%20been%20stuck%20for%2020%20years.png) TABLES HAVE TURNEDItaly never had to deal with the bursting of a housing bubble during the global financial crisis and its budget problems were smaller than those of the other four troubled countries.So it didn’t have to follow them in requesting a bailout from a so called Troika comprised of the International Monetary Fund, the European Commission and the ECB.It may now come to regret it.Under pressure and supported by money from international lenders, Portugal fixed its budget, Spain and Ireland cleaned up their banking sectors, and even Greece made reforms including to its pension systems, labour market and product regulations.Such efforts allowed these countries, to varying degrees, to start growing their economies again.Italy, by contrast, has not done enough to kick-start growth despite some changes to its pension system, labour market and, under Draghi, its notoriously slow justice system. As a result, the country that was once seen as the best of a bad lot is now paying the highest premium to borrow on the bond market after Greece – a country that defaulted twice in the past decade and is still rated “junk”.Lingering anti-euro rhetoric from some right-wing parties is also keeping investors on edge, with Intesa Sanpaolo (OTC:ISNPY) estimating that the risk of a return of the lira outweighed that of a default in the cost of buying insurance on Italian debt.”It very much paid off for Spain, Portugal and Greece to have the Troika,” Holger Schmieding, an economist at Berenberg, said.”Draghi is trying, has done a little bit here and there but neither I nor the market are yet convinced that trend growth in Italy is strong enough.” (Graphic: The tables have turned – Italy is stuck in a rut: https://fingfx.thomsonreuters.com/gfx/mkt/znpneakllvl/Pasted%20image%201657783892946.png) KICKED DOWN THE ROADAs ECB chief Draghi regularly stressed the importance of fiscal and other reforms by governments. But as premier of Italy he has had to spend much of his time mediating between parties with very different views on economic policy, meaning contentious issues like tax and pension reforms have been largely kicked down the road.Even if he rides out Rome’s current political turmoil, with his governing coalition weakened by divisions and general elections looming in the spring of 2023 at the latest, few expect the prime minister to turn things around. Draghi did finalise a plan presented to the European Union in return for almost 200 billion euros of pandemic recovery funds and ensured a solid start in meeting the hundreds of so-called “targets and milestones” it contains.But these are mostly small-scale tweaks to legislation – a total of 527 of which will need to be ticked off by 2026, long after Draghi is due to leave office.This money, made up of grants and cheap loans, could prove a lifeline for Italy if it needs to tighten its own budget.But the country’s track record on using financial help from Brussels is dismal. It managed to spend only half its EU funds in the last budget cycle, the second lowest share after Spain. (Graphic: Productivity in the euro zone: https://fingfx.thomsonreuters.com/gfx/mkt/akvezwmeypr/Productivity.png) LOST DECADE(S)In fairness to Draghi and his predecessors, Italy’s malaise is much older than the global financial crisis.Its GDP per capita is lower now than 20 years ago, when it was only a touch below France’s and Germany’s.All other European countries have grown over that period except Greece which has shrunk by less, leaving Italy as the worst performer in the bloc.Trend growth – or the average rate of increase over the economic cycle – is pointing up across all the so-called peripheral countries except for Italy, Eurostat data shows.Italian productivity – or how much economic output is squeezed out of an hour worked or a euro invested – stopped growing in the 1990s and has since fallen.Behind this lies a web of problems that include a rapidly ageing population, a low-skilled workforce, cloying red tape, a slow and dysfunctional justice system and chronic under-investment in education, infrastructure and new technology.Many euro zone countries have some of these problems, but few if any have all of them.Some economists including Chicago Booth School of Business professor Luigi Zingales say Italy essentially missed the digital revolution and blame what they call the Italian disease https://www.nber.org/system/files/working_papers/w23964/w23964.pdf of entrepreneurs who opt to keep a small business in the family rather than grow it with the help of outside investors. By joining the euro, Italy also lost the quick fix of being able to devalue its currency – a trick that helped Italian industry prosper for decades by making its exports cheap.”We chose the wrong growth model back in the 1980s,” said Francesco Saraceno, economics professor at Rome’s Luiss University and Sciences-Po in Paris.”To respond to globalisation we tried to compete with emerging markets by lowering costs instead of following the German example of investing in higher-quality production.” ($1 = 0.9917 euros) More

BEIJING (Reuters) – China is expected to report a sharp slowdown in economic growth in the second quarter after widespread COVID lockdowns jolted factories and consumers, although activity in June may have perked up.Data on Friday is expected to show gross domestic product (GDP) grew 1% in April-June from a year earlier, a Reuters poll showed, slowing from the first-quarter’s 4.8% pace.The expected growth would be the weakest since a steep 6.9% slump in the first quarter of 2020, when an outbreak of COVID-19 in the central city of Wuhan, first detected in late 2019, turned into a full blown epidemic.On a quarterly basis, GDP is forecast to have contracted 1.5% in the second quarter, versus growth of 1.3% in January-March, the poll showed.”The worst of the downturn is over. But recovery in the second half is unlikely to be too strong,” Nathan Chow, senior economist at DBS Bank in Singapore, said in a note. “Anemic consumption remains the most daunting challenge owing to labor market strains because sporadic lockdowns have resulted in pay cuts and a hiring freeze.”The government is due to release second-quarter GDP data, along with June activity data, on Friday at 0200 GMT.Data released for June so far point to a bumpy road ahead for the economy, with exports rebounding with the lifting of COVID lockdowns but a sharp slowdown in imports signalling tepid domestic demand.Some smaller Chinese cities have had to impose COVID lockdowns in recent weeks amid sporadic virus flare-ups, while the property market remains weak and the global outlook is darkening.Still, activity data for June is expected to show some improvement, as the government has rolled out a raft of policy measures, cutting taxes for businesses and channeling more money into big-ticket infrastructure projects.Industrial output likely grew 4.1% in June from a year earlier, picking up from 0.7% in May, while retail sales, a gauge of consumption which has been lagging since COVID first hit, likely levelled off in June after falling 6.7% in May.Fixed-asset investment may have expanded 6.0% in the first half, easing from 6.2% in the first five months, even as the government ramps up infrastructure spending to drive growth.Full or partial lockdowns were imposed in major Chinese cities from March through May, including the financial and commerce hub of Shanghai.The Reuters poll forecast China’s growth to slow to 4.0% in 2022, far below the official growth target of around 5.5%.The central bank on Wednesday pledged to keep liquidity reasonably ample and lower funding costs, foreseeing a temporary rise in the overall level of debt amid efforts to revive the economy.Analysts believe room for the central bank to ease policy further could be limited by worries about capital outflows, as the U.S. Federal Reserve aggressively raises interest rates to fight soaring inflation.China’s rising consumer prices, while not as hot as elsewhere, also may add to constraints on monetary policy easing. Many analysts expect consumer inflation to pick up and surpass 3% in the coming months, but the whole year average level will still be within the annual target of around 3%.”China’s recovery will likely continue amid global recession fears but inflation may increasingly become a source of concern. Without an imminent exit from zero-Covid, infrastructure investment will likely act as a key growth driver,” analysts at Citi said. More

El Salvador announced it was negotiating a possible $1.3 billion loan with the IMF in March 2021, aimed at filling gaps in the Central American country’s budget and reducing high costs associated with the country’s debt, which in March surpassed $24 billion.The deal’s future has looked uncertain since El Salvador rebuffed IMF calls for the government to reverse its decision to make bitcoin legal tender last September. In his remarks on Thursday, Zelaya said discussions with the IMF continue but played down the deal’s fiscal impact, which he said would amount to less than 10% of the national budget.”You have to put all these issues into context, but we’re maintaining conversations and once we have something concrete we will announce it.”Analysts including ratings agency Moody’s (NYSE:MCO) say the deal would boost El Salvador’s credibility and help shore up its shaky finances.”I’ve seen that some analysts believe that the deal with the IMF is going to completely improve the health of the country’s public finances, and no, it is one part of our strategy for improvement,” Zelaya said. More