by Tyler Durden
Sylvio Berlusconi is no stranger to being a catalyst for European crisis: in November 2011 it was his unwillingness to leave the PM post (and be replaced with a Goldman technocrat), that precipitated a bond crisis accented by the ECB's unwillingness to interject and buy Italian bonds until the career politician had left. Tomorrow, an Italian Senate committee is due to begin hearing arguments on whether to eject ex-PM Berlusconi from Parliament and on. The special Senate Elections and Immunities Committee will have its first hearing on Berlusconi’s expulsion from the Parliament and six-year ban on 9 September. It seems now less likely that a vote will already take place on 9 September. The decision of the commission will be followed by a vote of the whole Senate. According to Deutsche Bank, the duration of the process is unclear. Indeed, it could be lengthened by several months if the commission (or the parliament) asks for a ruling of the Constitutional Court. However, a worst case scenario could see the government fail, early elections being called, and a repeat of this February's political circus all over again, only this time with even less political capital, if such a thing ever existed in Italy.
As the Italian stock market already made clear on several occasions over the past two weeks, a political crisis in the coalition government which could see Berlusconi's PDL withdraw support from Letta, at a time when Europe is said to be recovering on the back of the peripheral countries (Germany has posted a slew of economic data misses recently) will hardly boost sentiment. Which is why all of Italy, and Europe will be following, the latest political spectacle in Italy quite closely.
Italian Prime Minister Enrico Letta warned of the risk of fresh political turmoil on Sunday, a day before a Senate committee meets to decide whether to expel the country's former leader Silvio Berlusconi from parliament.
As the two main partners in his fragile coalition prepare for a showdown over Berlusconi's future, Letta told business leaders that economic recovery had been hampered for too long by Italy's "permanent political chaos".
"Instability has a cost, it would mean that interest rates rise again and we'll all have to pay more," he said at a conference in the lakeside town of Cernobbio outside Milan. "Instability has drastic costs, whereas stability pays."
Naturally. The only question is at what cost does stability come: it seems that in Italy legitimizing behavior that abuses child prostition, tax fraud and mafia racket is an acceptable price to preserve the illusion of "stability" as measured by the FTSE Mib, and of course, confidence - the most scarce commodity in Italy and the world over the past 5 years. Which is precisely what is at stake tomorrow.
Letta's comments come a day before a Senate committee meets to begin deliberations which could lead to Berlusconi, who has dominated Italian politics as a politician and media magnate for decades, being expelled from parliament following his conviction for tax fraud last month. The cross-party panel has become the focal point of a battle over the political future of the 76 year-old billionaire, who was sentenced to a four year prison term which is likely to be commuted to one year under house arrest.
The PDL has warned it will pull out of the coalition and bring down the government if center-left members vote to start proceedings for expulsion although Berlusconi faces at least a year in political exile in any case once his sentence begins.
"I hope the government doesn't fall," said Marco Tronchetti Provera, chairman of tire maker Pirelli, echoing the concern. "I hope that a solution is found and that the country can start taking care of concrete problems in the interests of everyone."
A plan B is already being hatched to deal with the fallout of an unfavorable, for the stock market, decision:
Behind the apparently intractable positions, however, there may be scope for an arrangement which allows more time to work out a deal that could avoid a definite break.
Fabrizio Cicchitto, a former PDL floor leader in the lower house told the right wing Libero newspaper, which is generally close to Berlusconi, that much would depend on how the committee meeting plays out.
A discussion cut off in a couple of days, turning the committee into a "firing squad", would be a "provocation". But if PD members took time to discuss the status of the Severino law "we should maintain our support for the government."
"We can act in reaction, that's one thing, but if we in the PDL were the first ones to set off the crisis, we would be making a serious mistake," he said.
So once again, justice is left at the door when the threat of a selloff is at stake. Because in a world built on the foundations of artificial confidence and kept together with central banker superglue, nothing can be allowed to shake the false reflexive myth that things are fine and getting better: why just look at stocks.
As for our rhetorical title question: the answer, of course, is no. When a human decision, one "potentially" motivated by money has so much impact, one can be assured that nobody will vote with their conscience and everyone will vote with their offshore bank account.
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For those curious for more, here is Deutsche Bank with a comprehensive step by step analysis of what may happen as the fate of European stock markets hinges on the decision of an Italian court:
Italy: political and fiscal update
As expected, political tension over the summer increased following ex-Berlusconi final conviction for tax fraud in July. Tension peaked at the end of last week with a communiqué from the PDL that seemed to suggest that a government collapse was imminent. But, in our view, since Monday 26 August the likelihood of the government survival has increased materially due to three main factors, which we discuss below in their chronological order:
- Sharp negative market reaction to the potential government collapse
After a weekend where it appeared that the hawks within the PDL had the upper hand, the very negative equity market reaction has led, in opinion, to a more prudent approach. On Monday evening, ex-PM released an official communiqué calling for a suspension of the statements from PDL members of the parliament that had heightened tensions.
- Tentative openings on a Constitutional Court ruling on the ban from public office
One of the consequences of the final four-year tax fraud conviction for Berlusconi is the likely ban from holding public office. This is due to two parallel procedures:
— First, the July ruling by the Court of Cassation that upheld the tax fraud conviction against Berlusconi ordered a new appeal to review the duration of the ban from public office, between one and three years. The decision of the Milan Appeal Court should come before the end of the year. According to Il Sole 24 Ore, it never occurred in the past that the Parliament disregarded the Court’s decision, but there have been cases were it took time for the decision to be applied.
— Second, a longer (six years) and more immediate ban could be triggered by the December 2012 anti-corruption law. The law establishes that a more-than-two year conviction forbids that person from standing for election to the Italian parliament for six years and her/his expulsion from the Parliament.
A special Senate commission (Elections and Immunities Committee) will have its first hearing on Berlusconi’s expulsion from the Parliament and six-year ban on 9 September. It seems now less likely that a vote will already take place on 9 September. The decision of the commission will be followed by a vote of the whole Senate. The duration of the process is unclear. Indeed, it could be lengthened by several months if the commission (or the parliament) asks for a ruling of the Constitutional Court.
On 27 August in an interview with Il Corriere della Sera, ex-president of the Lower House Luciano Violante, a senior member of the PD, constitutional expert and close to the President of the Republic, opened the door to Berlusconi/PDL’s request for a ruling of the Constitutional Court. The PDL's argument is that the law cannot be applied to Berlusconi's case as the crimes occurred before the law was approved. Hence, according to the PDL the law cannot be applied because of the non-retroactivity principle (Art 25 of the Constitution).
However, the PD does not officially support Violante’s proposal. Although the PD continues to be fragmented, the whole party would risk paying a hefty price in terms of electoral support in favour of Grillo’s 5SM if it were to accept Berlusconi’s request for a Constitutional Court hearing. Hence, we may have to wait until 9 September to know the position of the PD. In the meantime, political tension may increase again.
- Cancellation of the 2013 property tax on first residences
On 29 August the government reached a compromise to cancel the property tax (IMU) on primary residences for 2013 and completely replace it with a new\ levy from next year. his is an important step for Letta’s government, at least in the short term for two reasons:
— Importance of IMU in the PDL manifesto: It is now more difficult for Berlusconi to use a motivation about the economy to bring down the government. His economic reform programme was based on the cancellation of the property tax on primary residences. If he wanted to use an excuse, he could have found enough reasons to say that his requests/electoral promises were not fully respected. Instead, he released a very positive official statement welcoming the government decision.
— Immediate early elections would jeopardize IMU cancellation: Note that the 29 August decree cancelled only the first tranche of property tax on primary residences due in June. The resources to cancel the second tranche will be finalized in a decree in mid October along with the 2014 budget law. This is potentially an important passage from a political point of view. Were either the government to fall before issuing the decree or the Parliament to be dissolved before it approves the decree, the December IMU tranche on first properties will have to be paid. Hence, from an electoral point of view, it would be difficult for Berlusconi to justify a sudden removal of his support to Letta government, above all after his and PDL’s very positive reaction to the government announcement.
- Political volatility is not over
Although less fragile, the above considerations do not mean that the Government is safe. The PDL now expects a step forward from the PD on 9 September by at least delaying the decision on Berlusconi and ideally agreeing to ask for a Constitutional Court ruling. The PD faces a trade-off between the government survival and risking alienating part of its electorate. Hence, political volatility is likely to remain. Although Italian sovereign yields remain low relative to the average of the past two years, the cost of political uncertainty and the sharp slowdown in structural reforms is reflected in our view in the compression of the spread of Spain’s sovereign yields versus Italy’s.
Time will be an important factor. In our view, the ex post credibility of Berlusconi’s threat to trigger a fall of the government will decrease as time goes by as the ban from public office closes in. Berlusconi would need to trigger the fall of the government in the very short-term if he were to maximise his possibility to stand for election.
Furthermore, going for early elections is a high risk strategy. By supporting the government the PDL and its leader will maintain a crucial role in determining Italy’s policies. A fall of the government would lead to an improved position only if the PDL were to win the election and obtain the majority premium in the lower house. The PDL would then also gain the majority in the various Lower House commissions. Although the PDL appears to maintain a lead in opinion polls over the summer, there is also the risk the PD could unite behind the young mayor of Florence who, in our opinion, could increase materially the possibility that the centre-left obtains an improved electoral response above all among the centrist voters.
Overall, we think that is now marginally more likely than not that the Government survives the next couple of months. The probability that the government then remains in charge for the whole of 2014 would increase materially.
That said, the hawks within the PDL could regain centre stage were the current legal issues for the ex-PM to worsen. Furthermore, note that there are other pending trials involving the ex-PM Berlusconi.
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