Paris Sweats, Campania Rolls Cigars

08/11/2011 12:16 pm EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

Europe’s financial panic still reads like foreign news in southern Italy, writes senior editor Igor Greenwald.

Europe’s game of financial whack-a-mole has become a global spectator sport, because everyone is curious whether any banks will still be standing when it ends.

As soon as the European Central Bank interrupted a run on the bonds of Italy and Spain by buying some, the fear trade moved on to France. First it was rumors that its AAA rating was at risk, fueled by the fact that most investors see a country more indebted than the US and stuck with an even lower long-term growth rate.

And as soon as all the major credit-rating agencies shot down that theory, rumors surfaced about difficulties at French bank Societe Generale (OTC: SCGLY).

SocGen may be a victim of the rumormongers, but it’s doubtful that it’s a lot more virtuous than the major Italian banks whose shares now fetch a euro or less.

There are reports Europe is now considering either a general short-selling ban or one limited to financial shares, much like the one adopted to no discernable effect in the US in the aftermath of the Lehman bankruptcy three years ago.

This will probably go on until Germany, to use the language it seems to understand best, either scheisses or gets off the pot. Europe can get along just fine, either as a true fiscal union or a collection of independent countries with separate currencies, but probably not as the current halfway house.

That time is coming sooner rather than later, because how much worse can things get?. People are wondering whether it’s 1931 all over again. The difference is that this time the disaffected may very well riot instead of waiting in soup lines.

With markets causing a run on crash helmets and canned food, it’s easy to lose sight of the fact that much of Europe is currently on holiday, and perceiving the financial panic as distant thunder from abroad.

This is true even for business people from the countries in the eye of the storm, as I learned this week after having dinner with a representative of a local Italian Chamber of Commerce.

While people are panicking on the stock exchange in Milan, life in Campania, the southern Italian province that surrounds Naples, goes on much as before. You’d be hard-pressed to find another (mostly) developed region less leveraged to the financial system.

Italian family portfolios, and especially those south of Rome, are made up mostly domestic bonds, not stocks. And right now, the bonds are still delivering the promised yields, even as stocks in Milan crater.

Sure, yields have shot up, but they’re declining of late. And as long as Italy keeps making the interest payments in euros—admittedly a somewhat dicey prospect at the moment—Ma & Pa Bondholder are unlikely to care.

They didn’t borrow on six credit cards, and Italy didn’t experience a housing bubble, so homes haven’t been used as ATMs.

So my new Italian friend, an educated man who’s worked in the US and Germany and traveled all over the world, seemed unperturbed by the goings-on in Milan, Paris, and Frankfurt.

He lives in a small city just off the coast that is celebrating its 1,000th anniversary this year, outlasting many economic and political regimes.

One of the biggest employers in the town is the maker of premium cigars from locally grown tobacco, and other crops from the fertile Campania soil are processed into food (pasta, canned tomatoes, and the like) for export to Saudi Arabia, which has just bribed its people (once again) into relative docility with lots of petrodollars. This is not a business that will go away because of SocGen’s losses.

Campania is not immune, of course, from the austerity pushed for years by Rome. Local bus companies are being merged and routes cut. The public health service charges higher fees and delivers less care than before.

But there have been no mass layoffs, since many locals are self-employed professionals and artisans. There have been no bank runs, and certainly no Tea Partying, which is seen in Campania as a northern Italian (i.e. foreign) vice.

Northern Italy may contribute most of the central tax revenue, my dinner guest acknowledges. But Southern Italians provide a lot of the savings that Northern banks then misallocate as loans to Northern companies, he points out.

Southern Italy is also a major reason the Italian economy has not grown for a decade—a major concern given that its national debt stands at nearly 120% of GDP.

The crony-ridden and thoroughly corrupt government of Silvio Berlusconi, a business magnate from the north, has belatedly woken up to this fact.

It’s pushing for labor reforms to get rid of a two-tiered caste system with older, tenured (and therefore rather unproductive) professionals at the top, lording it over younger workers on temporary contracts that skirt the antiquated labor laws, but also offer little possibility of career advancement.

Like most self-inflicted wounds, this one will be treated in time. Italy’s population is one of the oldest and most rapidly aging in the world, so a changing of the guard is guaranteed, and it’s clear that the current system doesn’t work.

One reason Italian bonds have been in trouble before the recent intervention by the ECB is that no one believes such reforms, sensible though they may be, will produce an economic renaissance. Italy’s skilled artisans are caught between the rise of cheap Chinese mass production on the one hand, and on the other the (possibly temporary) shortage of Asian aficionados of Cava de Tirreni cigars or Sorrento wood inlays.

But then Campania is used to doing without growth. And it’s still living a lot better than many of the fastest-growing places in the world.

Given a stable population, it’s possible that growth is overrated. Investors like it. But artisans just might be happier with steady, satisfying work.

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