From Milan To Manhattan: The Making Of A Horror Film Called The Western Economy

Analysis: How a toxic mix of public debt, slow growth and paralyzed politics has put the global economy on the edge of another crisis.

After a bloody week of bear markets (Lil Larkie)
After a bloody week of bear markets (Lil Larkie)
Francesco Manacorda

In order to beat the sovereign debt crisis and attempt to consolidate public accounts — in Europe as in Washington — it is urgent to cut public spending and raise taxes, otherwise there isn't any hope that other government interventions can give a jolt to the real economy.

It's a globalized film, and among the large euro-zone countries, Italy is the one with the weakest growth; the spring forecasts of the European Commission, which mirror those of the Bank of Italy, give our country a 1% recovery on GDP through 2011, compared with a regional average of 1.6%.

The state of public finances, with a debt-to-GDP ratio of 118%, marks a record in Europe, and requires solutions different from those of the government budget, which was essentially dead on arrival, simply postponing a large portion of the budget adjustments to 2013-2014.

Within this dramatic situation, the latest in a series of sovereign debt crises was triggered. By now, the international markets no longer consider the bonds guaranteed by the US safer than private, individual bonds. On the contrary, if for tiny Greece, which accounts for only 3% of European GDP, the EU's actions were too little too late, what could it do for the major economies of Italy and Spain? Very little, one fears.

In fact, it was far from comforting this week when the president of the European Central Bank, Jean-Claude Trichet, after having urged our country to lay the groundwork in our public finances for recovery, announced that the ECB had begun buying government bonds, but only those from Ireland and Portugal, and not Spain or Italy.

Not just speculation

But is it or is it not speculation that is raging against Italy? Speculative behavior belongs to those who sell a bond, usually without actually holding it, in the hope of triggering a decline that allows them to buy the same bond back at a lower price, thus turning a profit on the difference. In these days there is indeed speculation on security. But there are also many pure and simple sales of those who see trouble coming for Italy, and instead of betting against the deterioration of the situation, they prefer to simply call it quits.

While in Europe the fear is focused on the debt in the public balance sheets, on Wall Street the main worry is the anemic economic growth. Despite somewhat better news Friday with jobs numbers, we have seen a long series of data that depicts an American economy not nearly as strong as it was thought to be only a few months ago, most notably a GDP growth of 1.3%, well below expectations. (The latest grim news came Friday evening when Standard & Poor's downgraded the U.S. from its AAA credit rating for the first time since it was granted in 1917)

The ghost that is hovering above the United States is that of a "double dip" recession after the stock market rally that reached its peak in May was proven to be but an illusion. This is the fear. The hope is that, like any decent big-budget film, the heroes arrive just in time. The charge could be led by the Federal Reserve President Ben Bernanke, who launches the third "Quantitative Easing," to increase available credit by putting more dollars into circulation, and thus stimulating the economy.

But where does the money fleeing Wall Street in New York, Piazza Affari in Milan, as well as London and Frankfurt, wind up? Underneath mattresses (not as virtual as one might think), most likely because in times like these, choosing not to choose could be a logical choice. Gold remains at record levels, and the Swiss franc and German treasury bonds are solid. Some are even turning to the Japanese yen. Anything will do really…just to get out of the screening room of a movie that has gotten far too scary.

Read more in Italian from La Stampa

photo - Lil Larkie

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Iran-Saudi Arabia Rivalry May Be Set To Ease, Or Get Much Worse

The Saudis may be awaiting the outcome of Iran's nuclear talks with the West, to see whether Tehran will moderate its regional policies, or lash out like never before.

Military parade in Tehran, Iran, on Oct. 3


LONDON — The Iranian Foreign Ministry spokesman Saeed Khatibzadeh said earlier this month that Iranian and Saudi negotiators had so far had four rounds of "continuous" talks, though both sides had agreed to keep them private. The talks are to ease fraught relations between Iran's radical Shia regime and the Saudi kingdom, a key Western ally in the Middle East.

Iran's Foreign Minister Hossein Amirabdollahian has said that the talks were going in the right direction, while an Iranian trade official was recently hopeful these might even allow trade opportunities for Iranian businessmen in Saudi Arabia. As the broadcaster France 24 observed separately, it will take more than positive signals to heal a five-year-rift and decades of mutual suspicions.

Agence France-Presse news agency, meanwhile, has cited an unnamed French diplomat as saying that Saudi Arabia wants to end its costly discord with Tehran. The sides may already have agreed to reopen consular offices. For Saudi Arabia, the costs include its war on Iran-backed Houthis rebels fighting an UN-recognized government in next-door Yemen.

The role of the nuclear pact

Bilateral relations were severed in January 2016, after regime militiamen stormed the Saudi embassy in Tehran. Amirabdollahian was then the deputy foreign minister for Arab affairs. In 2019, he told the website Iranian Diplomacy that Saudi Arabia had taken measures vis-a-vis Iran's nuclear pact with the world powers.

It's unlikely Ali Khamenei will tolerate the Saudi kingdom's rising power in the region.

He said "the Saudis' insane conduct toward [the pact] led them to conclude that they must prevent [its implementation] in a peaceful environment ... I think the Saudis are quite deluded, and their delusion consists in thinking that Trump is an opportunity for them to place themselves on the path of conflict with the Islamic Republic while relying on Trump." He meant the administration led by the U.S. President Donald J.Trump, which was hostile to Iran's regime. This, he said, "is not how we view Saudi Arabia. I think Yemen should have been a big lesson for the Saudis."

The minister was effectively admitting the Houthis were the Islamic Republic's tool for getting back at Saudi Arabia.

Yet in the past two years, both sides have taken steps to improve relations, without firm results as yet. Nor is the situation likely to change this time.

Photo of Iranian Supreme Leader Ali Khamenei in 2020

Iranian Supreme Leader Ali Khamenei in 2020

Riyadh's warming relations with Israel

Iran's former ambassador in Lebanon, Ahmad Dastmalchian, told the ILNA news agency in Tehran that Saudi Arabia is doing Israel's bidding in the region, and has "entrusted its national security, and life and death to Tel Aviv." Riyadh, he said, had been financing a good many "security and political projects in the region," or acting as a "logistical supplier."

The United States, said Dastmalchian, has "in turn tried to provide intelligence and security backing, while Israel has simply followed its own interests in all this."

Furthermore, it seems unlikely Iran's Supreme Leader Ali Khamenei will tolerate, even in this weak period of his leadership, the kingdom's rising power in the region and beyond, and especially its financial clout. He is usually disparaging when he speaks of Riyadh's princely rulers. In 2017, he compared them to "dairy cows," saying, "the idiots think that by giving money and aid, they can attract the goodwill of Islam's enemies."

Iranian regime officials are hopeful of moving toward better diplomatic ties and a reopening of embassies. Yet the balance of power between the sides began to change in Riyadh's favor years ago. For the kingdom's power has shifted from relying mostly on arms, to economic and political clout. The countries might have had peaceful relations before in considerably quieter, and more equitable, conditions than today's acute clash of interests.

If nuclear talks break down, Iran's regime may become more aggressive.

Beyond this, the Abraham Accord or reconciliation of Arab states and Israel has been possible thanks to the green light that the Saudis gave their regional partners, and it is a considerable political and ideological defeat for the Islamic Republic.

Assuming all Houthis follow Tehran's instructions — and they may not — improved ties may curb attacks on Saudi interests and aid its economy. Tehran will also benefit from no longer having to support them. Unlike Iran's regime, the Saudis are not pressed for cash or resources and could even offer the Houthis a better deal. Presently, they may consider it more convenient to keep the softer approach toward Tehran.

For if nuclear talks with the West break down, Iran's regime may become more aggressive, and as experience has shown, tensions often prompt a renewal of missile or drone attacks on the Saudis, on tankers and on foreign shipping. Riyadh must have a way of keeping the Tehran regime quiet, in a distinctly unquiet time.

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