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Never mind the US pantomime
keep an eye on Italy

It is really quite unbelievable that a country of 325 million people can not find two better candidates for the presidential elections than two questionable OAPs who should be thinking how to make best  use of their bus pass. I normally love following election campaigns and would happily sit overnight to watch the results; watching history being made when Obama was elected was worth staying up for. This year’s US election campaign is not a matter of weighing up the pros and cons of each candidate, but more a case of voting for the least bad option. You do start to wonder about the US democracy when only a billionaire can compete with the Clinton and Bush dynasties. 

The problem is that whilst we are distracted by the Brexit feel good factor and the US Punch and Judy show, the world keeps turning. Events that could have major impact on the global financial markets are being kept out of the headlines by the Brangelina D.I.V.O.R.C.E!
In the meantime in Italy, PM Matteo Renzi is planning to hold a referendum to change the Italian constitution. He would like to change the laws to reduce the power of the upper house Senate which would then make it easier for the lower house to govern the country. On the whole this does not sound like a bad plan as Italy has had over 60 governments since the end of the second world war 71 years ago. At the moment the polls are showing the No side ahead as people fear that this will hand too much power to the Prime Minister, who has stated that he will resign if he loses the ballot.
So why am I bothered? Well you only need to study the graphs below. Stock markets give some reflection on how we feel economically. The first chart is the Italian Index, on the day following the Brexit vote the Italian bank shares collapsed. You can see that our vote had a worse impact on Italy than the problems in China and the Oil price problems we had in February and has not recovered since.

Exeter Financial Advisor
MSCI Italy Index, Source Thompsom Reuters EIKON

In comparison the second chart depicts the UK all share and shows that UK markets did not fall below the February lows and rebounded strongly even though the UK voted to leave the EU. This supports much of the news this week, but highlights the problems in Italy.


Exeter Financial Advisor
MSCI UK IMI Index, Source Thompsom Reuters EIKON

The last chart shows the relationship between borrowing and the Gross Domestic Product [GDP] for some of the countries that have been in the news. Italy’s borrowing is well above the point when Greece was bailed out by the Troika. It also looks like the Icelandic success is not limited to the football field; the Greeks must be wondering why they are not able to take the same route to economic relief and why the Italians don’t get the same treatment.

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Chart showing Debt to GDP ratios 2007 -2015

When other nations bit the bullet and dealt with their debts, Italy did not. This is because in Italy much of the debt is owned by household investors. The Italian government wants to protect the bond owners whilst the EU wants to enforce the rules to strengthen the banks. Failure for the two sides to compromise could send shock waves through the Euro Zone, possibly collapsing the Euro.

Should PM Renzi resign as a result of a lost vote we could see another technocratic government or the anti-establishment 5 Star Movement gaining power causing further instability in the EU. Unlike Greece whose economy is a tiddler with a GDP of $194 billion, Italy, although not quite a giant redwood, will make a deafening noise which will be heard throughout the EU if its $1,800 billion economy collapses.
The good news is that some of the commercial property funds that were closed to new business following Brexit will start to become available at the end of the month which will help improve diversity as we start winding down 2016.


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