Opinion

The Great Debate

from Breakingviews:

Does Italian capitalism prove that Darwin was right?

By Rob Cox

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

A procession of Italian industrialists and financiers slipped through the alleyways behind La Scala opera house two weeks ago to discuss the legacy of the man whose name adorns the piazza outside the building where they met: Enrico Cuccia. The group, ranging from a former Treasury minister to an iconoclastic fashion mogul, shared stories of the founder of Mediobanca, who’d passed away 14 years to the day. Yet for all the nostalgia that afternoon, absent was any obvious desire to turn back the clock to the days when Mediobanca was the unchallenged puppet-master of Italian business.

That’s surprising given the parlous state of corporate Italy. The uno-due punch of the financial and sovereign debt calamities has thrust the establishment into a profound crisis, one even more sweeping than the Tangentopoli corruption scandal that two decades ago sent dozens of Italy’s top businessmen and politicians into Milan’s San Vittore prison. The uniquely Italian form of capitalism conceived by Cuccia after World War Two is at last being consigned to history.

Though the revolution reshaping the nation’s economy is painful and prolonged, those with the most at stake know that Italy needs dramatic change. Deprived of the protections of the past – whether from the cash-strapped government in Rome or Mediobanca in Milan – Italian companies are at last being forced to play by the rules of global finance. Some 95 percent of the institutional investors who account for the bulk of trading on the Italian Stock Exchange are foreign. The survivors of this Darwinian selection will be the better for it.

Unlike the cyclical spikes in bankruptcy filings that typically accompany wrenching economic change in the United States, the evidence of Italy’s transformation is subtler, if wider-reaching. As companies pass the hat to investors beyond the Alps, they must transform their governance in ways that would have Cuccia turning in his grave on the banks of Lago Maggiore (assuming his body, stolen shortly after its 2000 burial, was ever in fact returned to its resting place).

from Ian Bremmer:

Europe’s necessary creative destruction

By Ian Bremmer
The opinions expressed are his own.

What we’re seeing in Europe -- in rising Italian borrowing costs and the felling of two prime ministers -- is the growing impatience of the markets for a resolution to the euro zone crisis. To put a finer point on it, the hive mind of the markets has decided it is not going to give Europe enough time to get its act together. The big institutions that drive the world’s economies are sitting on huge amounts of cash -- enough to solve many of these problems overnight. But they have lost confidence in the ability of the European political system to deliver solutions that will work.

In a G-Zero world, where there is no strong global leader to direct the course of events, no one is interested in taking a flier on helping the Europeans get out of their mess. As the abortive G-20 conference showed last week, there is no backstop for any country or institution that makes an error in today’s environment, whether it’s tiny MF Global or the Chinese sovereign debt fund. In the postwar era, the Marshall Plan was the very definition of global security -- it was a huge commitment by the U.S. to rebuild Europe into the economic force (and not incidentally, trading partner) that the world needed. Today, there is no Marshall plan for Europe, from within or without.

That’s the high-level view of the Europe situation. The question everyone wants answered is this: what happens next? Start with Greece: the best possible outcome for that country has happened with Papandreou’s resignation and the selection of economist Lucas Papademos as Prime Minister of an emergency government. Papademos is committed to remaining in the euro and accepting the terms of the Greek bailout package. Despite the roller coaster ride Papandreou took his country and the euro zone on, Greece has now moved closer to the Spanish and Portuguese models for avoiding the debt crisis drama. In Greece, a resolution is starting to be reached. It’s not the beginning of the end, but maybe this is the end of the beginning.

from Jeremy Gaunt:

The rule of three

It is beginning to look like financial markets cannot handle more than three risks. First we have, as MacroScope reported earlier,  Barclays Wealth worrying about U.S. consumers, euro zone debt and Asian overheating.

Now comes Jim O'Neill and his economic team at Goldman Sachs, with three slightly different notions about risks in the second half, this time in the form of questions. To whit:

1) How deep will the U.S. economic slowdown be and what will  the policy response be? (That's two questions, actually, but let's not nitpick).

from The Great Debate UK:

Not much stress, not much test

-Laurence Copeland is professor of finance at Cardiff University Business School. The opinions expressed are his own.-

Back in the 1950’s, when most women stayed at home while their menfolk went out to work, a favourite trick of life insurance salesmen was to walk into the prospect’s home at dinner time and ask the wife:

“Mrs Smith, have you ever thought what would happen if your husband keeled over and had a heart attack right now?”

from The Great Debate UK:

A history lesson for lenders

GREECE

-Laurence Copeland is a professor of finance at Cardiff University Business School. The opinions expressed are his own.-

Anyone looking for a broader perspective on the events of the last three years could hardly do better than choose for bedtime reading “This Time is Different” by Carmen Reinhart and Kenneth Rogoff.

It is nothing less than a history of financial crises through the ages, starting in late medieval England and continuing via 15th and 16th century Spain and its New World colonies on to the teething problems of Britain’s banks in the industrial revolution and the upheavals of the 20th century, ending in 2008 with the bankruptcy of Lehman Brothers.

Watch banks for clues on Greece

– James Saft is a Reuters columnist. The opinions expressed are his own. –

As odd as it sounds, concerns about the effects of a euro zone sovereign crisis on Europe’s still poorly capitalized banks may prove to be the tipping point that leads to a swifter bailout of Greece.

While discussion of contagion may seem very 2008, the problems with Greece, which faces a huge fiscal deficit, are becoming tougher for euro zone authorities to leave uninsured.

Icelandic, Greek sagas show sovereign risks

– James Saft is a Reuters columnist. The opinions expressed are his own. –

Developments in cash-strapped Iceland and Greece nicely illustrate two themes for 2010: sovereign risk and financial balkanization.

Iceland is balking at crushing terms demanded as part of its making whole overseas depositors in its ruined banking system, while Greece is involved in a game of chicken with the euro zone authorities over how, when and with whose assistance it heals its fiscal difficulties.

Betting on the unthinkable in the euro zone

James Saft Great Debate — James Saft is a Reuters columnist. The opinions expressed are his own –

Some crises bring partners closer together. Some, as investors in the euro zone are likely to discover this year, drive them further apart.

Look for rising tensions about fiscal and monetary policy among the bloc’s 16 member nations, and for a bigger penalty to be imposed on the euro and some euro zone assets against the possibility of a breakup or a secession from the currency group.

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