El Pais, Spain’s biggest daily newspaper, alleged a week ago that Prime Minister Mariano Rajoy, along with other members of his People’s Party, received illegal payments from the party for a period of 11 years.
Scandal and forgeries
The response from the People’s Party has been that the documents are forged. Even if the government survives, these allegations will certainly undermine its political capital and make the austerity process harder to achieve.
A derivatives scandal at Italy’s third biggest and reputedly the world’s oldest bank, Monte dei Paschi di Siena (MPS), is also threatening to have wide-ranging consequences, not least for the elections which will be held on 24-25 February. MPS has had to seek €3.9bn in bailout bonds from the state in order to bolster its weak capital position and admitted that a series of derivatives contracts taken out between 2006 and 2009 could lose more than €700m.
This is MPS’s third bailout, with the €3.9bn injection covering the previous injections.
MPS has long been tied to the local government in Siena and Tuscany, the heartland of the centre-left PD (the Democratic Party – Partito Democratico in Italian). The former chairman of MPS is allegedly closely linked to a number of PD politicians and it is claimed to have been a major contributor to the party. This has led to what might have seemed unthinkable three months ago: the resurrection of Silvio Berlusconi.
A SkyTG24 opinion poll last Friday put Berlusconi’s coalition at 28.7%, less than 5% behind the PD party. Beppe Grillo, a comedian who is campaigning for Italy to leave the euro, is on 15.7%, with Monti’s new ‘non-political’ grouping on 13.8%. Berlusconi is naturally attempting to make political capital out of the scandal by linking the bailout to an unpopular new property tax, the IMU, which has raised a similar amount of revenue.
Berlusconi claims he will repeal the IMU with last year also being refunded. Berlusconi, of course, was PM when MPS got its first bailout of €1.9bn back in 2009 and abolishing IMU won’t reverse the costs of the bailout. Berlusconi’s IMU gambit might attract some voters but is unlikely to enhance Italy’s fiscal credibility.
Damaged reputations
Before Friday’s poll, consensus amongst political analysts was that this scandal was unlikely to impact the result of the election. Although we would not wish to infer too much from a single opinion poll it was a reminder that nothing is certain in politics.
The scandal could also damage Mario Draghi’s reputation who was Governor of the Bank of Italy not only when the trades occurred but also in 2010 when the transactions were discovered by a central bank audit. These results were allegedly then covered up.
Italian justice is not known for its speed and finding out the extent of the Bank of Italy’s culpability in this scandal might not be known for many years. In the meantime, it could prove to be an unhelpful distraction to Draghi in a year when progress on a European Banking Union needs to be made.
The ECB will have to demonstrate to sceptical German and Finnish electorates that they are up to the job of preventing banks from getting into trouble.
“Politics is for the present, but an equation is something for eternity,” claimed Einstein.
For investors, the troubles in European politics could start to feel like they are lasting for an eternity. The equations behind cyclical adjusted price/earnings ratios can always be open for debate but on Barclays’ numbers, eurozone countries make up nine out of ten of the cheapest countries in the world.
Patience is likely to be rewarded eventually, but the crisis in Europe is still far from over.
