What are bond markets saying about Italy? With my usual proviso that markets are best understood as shoals of piranhas, communicating moods of panic, indifference, bloodlust and satiety rather than coherent ideas, the relatively clear message earlier this week was that Italian government bond yields were perilously close to the threshold of panic.
That threshold is widely deemed to be 7 per cent, more than 4 per cent above benchmark yields for German, French and Dutch debt. Let me try to put this in perspective. The incremental interest cost to the Italian treasury is about €2 billion per percentage point per year, which doesn’t sound too terrifying. Italy has more debt than Spain, Portugal, Ireland and Greece combined, making it too big to be bailed out with the resources at the EU’s disposal, but unlike Greece it also has a productive private sector and a primary budget surplus before debt costs. Cumulative higher debt costs will erode any last traces of growth, however, in turn shrinking tax revenues and fuelling deficits. And bond-market technicalities combined with investor flight mean that, once the threshold of panic has been passed, yields will rise more steeply still.
In those circumstances, central bank bond-buying to hold yields down can have only temporary impact and the necessary ammunition will soon be exhausted. Then another threshold will be reached, at which there is no longer a market in which Italy can borrow new money at all. But Italy needs to raise €50 billion before the end of the year, and its next bond auction is scheduled for 14 November. If nothing has changed by then — as the jealous husband sings at the end of Pagliacci after stabbing his wife and her lover — ‘la commedia è finita’.
Silvio Berlusconi never sang bel canto opera, but perhaps in his days as a cruise-ship crooner he belted out that old Doris Day number ‘Que Sera Sera’, a cod-Spanish rendering of the Italian ‘che sarà, sarà’, or ‘whatever will be, will be’. The most discredited and disreputable of the dismal European bunch, the only thing he can do to help his country is to leave the stage as soon as possible. I’m pretty sure that’s what markets have been trying to tell him.
Corzine’s Greek drama
Wall Street has been gripped since the summer by fear of ‘counterparty risk’ in European banks that might be over-exposed to the debt of their own and neighbouring governments, so there is irony in the fact that the first US firm to go bust as a result of the eurozone crisis managed to do so all by itself. MF Global was a New York derivatives broker which had been investing heavily in high-yielding, fast-sinking bonds from Greece and other endangered eurozone issuers. And its collapse has taken with it the career of its high-profile chief executive, the former New Jersey governor and Goldman Sachs boss Jon Corzine.
Regulators are looking into allegations that the firm mishandled $600 million of clients’ funds by using them for its own dealings, but MF Global was not big enough to cause a ‘systemic’ wobble. It had a rich history nevertheless. Until its flotation in 2007 it was part of the Man group, now a hedge-fund operator but originally a trader in sugar and naval rum in 18th-century London. The most influential investor behind MF Global was Christopher Flowers, a former Goldman Sachs partner whose private-equity fund is frequently named as a potential bidder for Northern Rock and other UK retail banking interests. It was Flowers who persuaded Corzine to take the helm at MF Global.
Always a bullish operator, the bearded Corzine never forgave some of his other Goldman classmates — notably bald-eagle Hank Paulson, who went on to be US treasury secretary, and Superman-lookalike John Thain, who went on to run the New York Stock Exchange, and Merrill Lynch — for ousting him from the investment bank in a palace coup in 1999. Having also lost his governorship, he had everything to prove when he came back to the Street. So he set out to build MF Global into the next Goldman Sachs — and his failure is a Greek drama in more than one sense, since it is also a perfect illustration of hubris and nemesis.
The airline pirate
Given the economic disarray in most of the markets it serves, Ryanair’s financial performance is remarkable. For the six months to September, the Dublin-based low-cost airline that treats its passengers with such piratical disdain carried four million more of them than in the same period last year, and clocked up a 20 per cent profit increase despite a 37 per cent rise in fuel costs. The brilliance of its business model is that ‘ancillary sales’ — everything that isn’t your ticket, including the overpriced on-board snacks that we all whinge about but buy anyway — almost equal the profit, while the all-important measure of revenue per passenger-kilometre is protected by aggressive ‘capacity discipline’, which means keeping planes on the ground when there aren’t enough whingeing punters to fill them.
Chief executive Michael O’Leary, the genius behind this formula, has raised his full-year profit forecast by 10 per cent to €440 million and expects to pull in more passengers in the fallout from British Airways’ takeover of his loss-making competitor BMI. It’s often said that a man with his relentless focus on results and obliviousness to those he offends is wasted running an airline and ought at the very least to be running the Irish government. But since his native land now seems to be rediscovering its own forms of capacity discipline, I’d back him for a bigger job — as the first finance minister of a fiscally integrated but flat-on-its-back and shrunken eurozone. His approach to a fruitless succession of EU summits would certainly be refreshing: when Dublin airport was closed by strikes and the then taoiseach invited him to take part in round-table ‘crisis talks’, O’Leary’s succinct answer was, ‘F*** off and open the airport.’ In a sense, that’s exactly what Europe needs to do.
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