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from MacroScope:

Davos Day Two — Rouhani, Lew and Lagarde

Day one in Davos showed the masters of the universe fretting about Sino-Japanese military tensions, the treacherous investment territory in some emerging markets and the risk of a lurch to the right in Europe at May’s parliamentary elections which could make reform of the bloc even harder.

Today, the focus will be on Iranian President Hassan Rouhani (and his main detractor, Israel’s Netanyahu). Presumably he’s there to woo the world of commerce now sanctions are to be relaxed in return for Tehran suspending enrichment of uranium beyond a certain level. Anything he says about Syria’s peace talks, which have so far been more hostile than conciliatory, will instantly be headline news.

Other big name speakers are U.S. Treasury Secretary Jack Lew, IMF chief Christine Lagarde, who is going around warning about the threat of European deflation, Australian premier Tony Abbott, who is running the G20 this year, and a session featuring the BRICS finance ministers.

There is clearly a pervading sense of caution, if not alarm, about emerging markets. That aside, with the U.S. recovering and the existential threat to the euro zone over, perhaps delegates will look most nervously to the east.

from John Lloyd:

Beppe Grillo’s anti-disappointment party

Jim O’Neill, head of Goldman Sachs Asset Management, thinks Beppe Grillo and his Five Star Movement is a greater threat to Europe and the euro than the trials of little Cyprus. That’s because Grillo received more than a quarter of the votes in February’s election in Italy and has since gridlocked the political system by refusing any dealings with the established parties. A government can’t be formed.

O’Neill warned that if growth does not come soon to the euro zone’s third-largest economy, stalled for longer than any other in Europe, even more people will start to support Grillo’s movement and its call for a referendum on membership of the euro zone. What, he asked, does Grillo think? His response: “Does anyone really know?”

from MacroScope:

Euro zone week ahead

Italy will continue to cast a long shadow and has clearly opened a chink in the euro zone’s armour. It looks like the best investors can expect is populist Beppe Grillo supporting some measures put forward by a minority, centre-left government but refusing any sort of formal alliance. That sounds like a recipe for the sort of instability that could have investors running a mile. The markets’ best case was for outgoing technocrat prime minister Monti to support the centre-left in coalition, thereby guaranteeing continuation of economic reforms. But he just didn’t get enough votes. Fresh elections are probably the nightmare scenario given the unpredictability of what could result.

The story of the last five months has been the bond-buying safety net cast by the European Central Bank which took the sting out of the currency bloc’s debt crisis. But now it has an Achilles’ Heel. The ECB has stated it will only buy the bonds of a country on certain policy conditions. An unwilling or unstable Italian government may be unable to meet those conditions so in theory the ECB should stand back. But what if the euro zone’s third biggest economy comes under serious market attack? Without ECB support the whole bloc would be thrown back into crisis and yet if it does intervene, some ECB policymakers and German lawmakers will throw their hands up in horror, potentially calling the whole programme in to question.

from MacroScope:

A flaw in euro zone defences

Italy continues to dominate European financial markets and it looks like the best they can expect is populist Beppe Grillo supporting some measures put forward by a minority, centre-left government but refusing any sort of formal alliance. That sounds like a recipe for the sort of instability that could have investors running a mile. Outgoing technocrat prime minister Monti is speaking Brussels today. The markets’ best case was for him to support the centre-left in coalition, thereby guaranteeing continuation of economic reforms. But he just didn’t get enough votes.

Fresh elections are probably the nightmare scenario given the unpredictability of what could result.

from John Lloyd:

Italy elects the impossible

In a parliamentary election this week, a majority of Italian voters – some 60 percent – chose parties that even a cursory glance could tell had no coherent idea of how to run an advanced and complex state (let alone Italy). Forty percent voted for two groups that have a recognizably sensible approach to governance, the largest of which is mainly made up of the Democratic Party, heirs to the former Communist Party of Italy. In one of the smaller ironies of the election, these heirs of an anti-capitalist, anti parliamentary revolutionary ideology were regarded, especially by investors, bankers and politicians of both the center-right and center-left, as Italy’s greatest hope for constitutional and market stability

Just under 30 percent of the vote went to the coalition put together by Silvio Berlusconi, a man not exactly proven at being able to govern Italy well. He is yesterday’s but also tomorrow’s man, who saw his run for office – once regarded as something of a joke – embraced as he promised to return, in cash, citizens’ payments of a property tax for which his party had voted; asked a young woman how often she climaxed; and remarked, on Holocaust Remembrance Day, that former dictator Benito Mussolini, whose racial laws condemned thousands of Italian Jews to concentration camps and death, had done some good things in his time. He didn't win, but nearly did; which means he remains a major power in the land.

from John Lloyd:

Beppe Grillo: The anti-politics politician

For some three decades, an Italian comedian named Beppe Grillo has satirized – viciously, at high volume, naming names – the corruption of Italian politics. Last week, in Italian elections, he won the honor of being a part of the very thing he mocks.

When Grillo started doing comedy, in the early eighties, the Socialist Party – led by Bettino Craxi, prime minister from 1983 to 1987 – was in coalition with the Christian Democrats, and was a byword for theft from the taxpayer. Italians would say: The Socialists haven’t been in power before, they know they won’t last, so they have to make money quickly – a kind of resignation to the inevitability of political larceny that the British mind (mine) found quite shocking. Grillo was also shocked: or at least, he made shock the basis of his act. More than any other public figure, he fashioned from the venality of Italian political life a dark, bitter and yet hilarious comedy.

from Global News Journal:

No hope, no vote…

As Italians began trickling to the polls to vote in the general election on Sunday, some protested to show their disillusionment with politics.

Angry at plans to build a landfill site nearby, one group of young Neapolitans  gathered 600 election identification cards and sent them to the Italian president instead of using them to vote.

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