vol. 1 issue 13

Greetings,

In June, the London Financial Times published an op-ed written by Marcello Minenna, the head of quants at Italy’s securities market regulator. He alluded to the possibility of an Italian exit from the EU. It’s still a sleeper story Stateside, but, #quitaly is a thing and it is gaining momentum.

Minenna starts by comparing Greece’s debt load to Italy’s. For the former, debt accounts for 182 percent of the GDP. In Italy, it’s 133 percent.

He observes – warns, really – that while this might at first glance make Greece seem the less stable EU member of the two countries, in fact, the cost to insure purchases of Greek debt is the reverse of what it costs to purchase Italian debt. Minenna’s math indicates that global credit swap default markets see Italy’s chances of leaving the EU as 2:1 compared to Greece, based in part on the fact that the cost of insuring five-year bonds in Athens has fallen significantly since 2016, while it has done the exact opposite in Rome over the last year or so.

The reason for this upward trend in the cost of Italian debt, according to Minenna, is Italy’s recently elected far right-anti-establishment coalition government’s refusal to commit to EU budget rules (which Greece has adopted and even outperformed) and because markets are puzzled by calls from some in the new coalition for a parallel Italian currency to help pay down the national debt.

The more unstable are Italy’s politics, the less foreign investment there is. The less investment, the greater the risk of default, and so on…why the heck wouldn’t Italy just say ciao as a way to stop the bleeding so it can re-write its own financial terms? Or, short of pulling out, what if they just collapse anyway, pulling markets into a pile with them? Then, like Greece before them in 2010, they will be faced with complying with EU rules to stay in, or be forced out. Since the sentiment to stay or leave is fluid in Italy…who knows?

Italy’s exit would not only pose a threat to the stability of the EU, since an appetite for abandoning the EU remains in Greece and a nationalist sentiment is growing in Spain and France, it would negate Britain’s outlier status post-Brexit.

If Italy were out of the EU, why wouldn’t these two nations, especially since both have strong Euroskeptisim, not align in some form or fashion?

How we prepare to respond to a post-Brexit world should focus America’s attention: Will treaties and other alliances with the UK now need to include Italy? Will it impact how we do business with EU countries? Along what lines will we create defense treaties? Will British Commonwealth nations feel differently about their commitment to the queen? Don’t forget Scotland is ready to hightail it out of the UK.

Also keep in mind that were a Britaly to happen, we are less likely to be in the important inner-loop now, thanks to another explosion of POTUS that has unnecessarily damaged our relationship with the UK. Also this month, UK foreign office ambassador Kim Darroch resigned after the president unleashed a tirade to verbally punish him when it was leaked that Darroch’s team viewed the president in an unfavorable light. There is nothing good that has come from this, only further separation from those who are most likely to understand us in the world because they know us so well.

Tuesday resumes our regular publishing schedule. Podcasts will return soon…

Whitney