Wednesday, November 23, 2011

Italy: Euro May Hinge on Italian Savers

LONDON — Even though Europe’s debt crisis has turned Rome into financial ground zero, Italy has been able to lean on at least one solid support: the relatively large amount of government debt held by Italians themselves.

Nearly 57 percent of Italian debt is held by Italian banks, insurance companies and individuals. Those holdings have helped slow the flight of capital from Italy, even as foreign investors have been withdrawing their money from the country to park in safe havens like German, Swiss, American or Japanese government bonds.

But financial officials have become jittery about the possibility that Italians may stop buying this debt, and instead become more like Greeks and send their hard-earned savings abroad.

If that were to happen, it would greatly raise the odds that Italy, the third-largest economy that uses the euro currency, would be forced to seek a bailout — a move that could risk the future of the entire euro zone.

Hoping to stave off that calamity, the country’s banking industry and some prominent businessmen have banded together to sponsor a “buy Italian bonds day” next Monday, in which individual Italians who buy government bonds will be able to do so without paying commissions.

It is but the latest step taken by Italy’s increasingly skittish financial establishment to induce the nation’s cash-rich savers to continue financing the country’s sky-high debt, which is 130 percent of the gross domestic product. Compared with debt-saddled Greece, Spain and Ireland, Italy is much less reliant on foreign investors to finance its debt.

And more so than in any other euro zone country, Italian citizens have been active buyers of government debt, with such bond holdings representing 10 percent of household assets. So far, the evidence suggests that Italian households are not panicking.

According to Luca Mezzomo, chief economist at the banking group Intesa Sanpaolo in Rome, deposits in Italian banks remained stable through September. (The banks, in turn, use much of those savings to invest in government bonds.)

But Mr. Mezzomo concedes that the government has come under increasing pressure to do all it can to keep Italians buying bonds — especially now that foreigners are aggressively selling.

“I am confident that you will see demand from retail investors,” he said, pointing to the high yields on Italian debt. “There is a long tradition of investing in government bonds in Italy.”

The Italian treasury is doing its bit, too, with a plan to sell its debt online to individuals.

And while the high yields, or interest rates, on Italian bonds are an international distress signal, to domestic investors they may be a good way to profit.

“Bonds are a very lucrative investment now,” said Maria Letizia Ottavella, an architect in Rome. “I am deeply convinced that we should all buy Italian bonds to support our economy.”

And yet — and here’s where jitters arise — other indicators suggest that money is nonetheless fleeing Italy at worrisome levels.

John Whittaker, an economist at Lancaster University in Britain, has analyzed how much each of the 17 central banks within the euro zone’s system are borrowing from the European Central Bank. A sharp increase in this figure generally suggests money is leaving the country. When that happens, a nation’s central bank must borrow more to keep the banks afloat.

Mr. Whittaker found that between June and September of this year, the Italian central bank had borrowed 109 billion euros (roughly $145 billion) from the European bank. Before then, the Italian central bank had a 6 billion euro surplus at the European Central Bank. Mr. Whittaker says the borrowing surge was most likely a response to foreigners withdrawing their money from Italian banks, but says that it could also include Italians shifting some of their assets abroad.

“This is capital flight,” he said.

Relative to the 1.3 trillion euro pool (roughly $1.75 trillion) of Italian bank deposits, even 109 billion euros is a small figure. And it may largely reflect the move by foreigners to pull their money out of Italy. But if Italians were to follow suit, the consequences for the nation and the euro zone would be dire.

When Greece, Ireland and Portugal could no longer persuade enough domestic investors to buy bonds after foreigners decamped, the next step was a bailout.

Since the debt crisis hit Italy, many euro zone policy makers and central bankers have been betting that Italian savers will act like their counterparts in another savings-focused nation — Japan — and continue to buy government bonds even as the nation’s overall debt and attendant risks grow further.

Indeed, of all the economies in the euro zone, Italy’s may most closely resemble Japan’s.

The two have persistently high debt — fully 230 percent of G.D.P. for Japan — as well as aging populations of conservative savers and bond markets that rely more on domestic rather than foreign investors to provide crucial financing. (Japan’s median age of 44.8 years is closely followed by Italy’s, at 43.5.)

According to Morgan Stanley, Italians sit on 8.6 trillion euros of net wealth — or about 340,000 euros per household, the highest among major industrial nations. Of that figure, 3.6 trillion euros is in the form of financial assets.

So far, that pile of savings has been adroitly channeled into the bond market, either indirectly via deposits at Italian banks or directly through Italians’ purchases of government bonds.

In a recent study, Carmen M. Reinhart and Jacob Funk Kirkegaard of the Peterson Institute for International Economics in Washington highlighted the extent to which governments in the euro zone (and other indebted nations, especially Japan) have taken steps to create a captive domestic audience for their borrowing needs. They call it a form of financial repression.

This can be done through a variety of measures that include providing tax incentives to encourage bond buying, keeping interest on savings accounts artificially low to make bonds more alluring, as well as persuading government-linked entities like public employee pension funds to step up their bond purchases.

In that vein, Mr. Kierkegaard argues, Italian savers, even with the increased uncertainly, are likely to get the message and keep buying government debt, instead of heading for the exits like their Greek counterparts.

“In rapidly aging societies like Japan and Italy, the broad population will be extremely cautious about initiating such a run as they know they will be heavily dependent on government services going forward,” Mr. Kirkegaard said.

Japanese experts point out, however, that it may be a mistake to draw such a close parallel. Investors in Japan have been buying government bonds in relative isolation, with few easy investment alternatives in their region.

Japanese bond buyers also have the benefit of a strong domestic currency, the yen, that is bolstered by the country’s robust net savings position — as measured by the national current-account surplus, which is 2.2 percent of G.D.P. (Italy has a current-account deficit of 3.8 percent of G.D.P.) By comparison, an Italian saver might easily see the benefit in transferring his savings to Germany or Switzerland out of fear that Italy might be forced to leave the euro currency union.

Moreover, international investors consider Japanese government bonds such a safe place to park money that Japan pays slightly less than 1 percent on its 10-year bonds.

On Tuesday, Italy’s 10-year bond yield was nearly 6.8 percent, a dangerously high cost of borrowing that is probably unsustainable and remains the nation’s biggest financial risk.

All of which is why, as Italians become more anxious, the world is watching to see if they seek a safer haven for their money.

As Mr. Whittaker, the economist, warned, “It just takes a few taking their cash out — and then it can quickly turn into a flood.”

- new york times

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