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The Berlusconi Effect

The day after Silvio Berlusconi makes some announcement or another relating to his political ambitions, Italy’s stock market tends to crash and the dreaded spread widens once more.

While it’s not clear there is a link, quite soon after Berlusconi generated lots of media attention saying he wanted to propose himself as Italy’s prime minister for yet another term, Moody’s promptly downgraded Italy once more to two levels above junk status.

One of the explanations given by Moody’s for the downgrading was:

“The political climate, particularly as the Spring 2013 elections draw near, is also a source of [reform] implementation risk.”

Could Silvio Berlusconi’s re-emergence be regarded as a “source of implementation risk”?  Well, whenever he speaks, Italy seems to suffer.

Berlusconi left Italy in a somewhat grim state after many years of promises but few genuine and effective reforms.  His government was not able to cause Italy’s economy to grow, indeed, the opposite happened.  Signs of recovery do not seem to be on the horizon either.

Not everything the Berlusconi’s government did was bad.  The Berlusconi team did manage to keep Italy’s primary surpluses at a good level, higher than those of Europe’s economic powerhouse: Germany.  Primary surpluses are the difference between government spending and income, excluding interest payments on debt, if you are unsure that the term means.  The trouble is that while Italy’s public finances were, and still are, not too unhealthy, they are not healthy enough to calm fears of Italy defaulting on its sizable debt repayments.

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Scandals, often concerning Silvio Berlusconi himself, but not only, brought the government he led to a standstill, hence the appearance of Mario Monti.  Monti is actually managing Italy’s finances, and while not everyone in Italy appreciates he is doing what needs to be done, his strategy is likely to produce long term benefits for Italy’s economy, or at least Moody’s believes so:

“A successful implementation of economic reform and fiscal measures that effectively strengthen the growth prospects of the Italian economy and the government’s balance sheet would be credit positive and could lead to a stable outlook.”

Monti has credibility at international level, and this counts for a lot in such turbulent times.  Silvio Berlusconi, on the other hand, managed to reduce what were never exactly high levels of faith in his ability, to rock bottom lows.  Hence the fear his return generates.  Almost as soon as he opens his mouth, Italy’s stock markets crash.

Berlusconi might, of course, be benefitting financially from the depressing effect he has on Italy’s financial markets.  Someone with lots of liquidity could theoretically buy up lots of stock when the market is spiraling downwards.  That same someone can then keep quiet for a few weeks, wait for the markets to recover, and sell all the stock at a healthy profit.  Certain stocks have been falling 10% and then rising in value by 10%.  Someone could make a lot of money from this nervousness and I dare say some are.  That same someone could then open his mouth and repeat the cycle.  What a lot of money could be made in this way.

The annoying thing is that had Silvio Berlusconi not been mired in legal tangles and scandals, he could have introduced reforms, such as cracking down on Italy’s ridiculously high levels of tax evasion, which might have left Italy in a more crisis resistant state.  Sadly, though, whenever Berlusconi did try and reform something, he inevitably discredited his reform by slipping in a Berlusconi personal protection clause, or two.   People saw through these little tricks and the reforms never made any progress.  Basically, Silvio Berlusconi was an unsuitable candidate for the leadership of Italy.  He would have been more palatable if his closet had contained fewer skeletons, but it did not.  The ever smiling, joke cracking, leader’s love of nubile young call-girls did not help matters one bit either.  Silvio Berlusconi, it seems, is unable to keep himself out of trouble.

For the moment, Berlusconi is keeping relatively quiet and guess what?  Yes, Italy’s stock markets are doing rather well.  Even the spread is looking slightly less dangerous.

Will Berlusconi keep quiet, or will the temptation to make a quick buck on Italy’s stock markets cause him to open his mouth once again?  We’ll see.  He certainly stands to profit by calling upon the Berlusconi effect, even if Italy will not.

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