Monday, February 26, 2024

Italy is Selling It’s Crown Jewel, to Tackle the Massive Public Debt

HomeFinanceItaly is Selling It's Crown Jewel, to Tackle the Massive Public Debt

Rome – Italy’s colossal national debt has forced Prime Minister Giorgia Meloni to put some of the country’s crown jewels on the auction block, despite her earlier vows to keep them under state control.

The forced sales of shares in postal service Poste Italiane, railways Ferrovie dello Stato, and energy giant Eni aim to raise €20 billion by 2026 to chip away at Italy’s €2.8 trillion debt pile. That debt equates to around 140% of GDP, the second highest debt-to-GDP ratio in the eurozone.

Analysts warn the privatizations will barely dent the monumental debt obligations, instead depriving the state of hefty dividend income. But Meloni insists “light years” separate her approach from past governments that critics accuse of gifting state assets to cronies.

Selling Off the Family Silver

The decision to relinquish part of the state’s 64% stake in Poste Italiane marks a major U-turn for Meloni. Back in 2018, she vigorously opposed its privatization, declaring the postal service a “crown jewel” that must stay in Italian hands.

Her government originally intended to retain a 51% controlling stake in the profitable company, which offers banking and insurance services. But last week, Finance Minister Giancarlo Giorgetti indicated the state share could fall as low as 35%.

That could raise around €4 billion by selling the state’s 29% direct stake, based on Poste’s current market value.

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Meloni’s right-wing coalition argues controlled sales can boost efficiency without undermining state influence. But opposition lawmakers accuse her administration of betraying earlier pledges to protect national assets.

Andrea Orlando, from the center-left Democratic Party, blasted the sell-offs, saying “the government always claims to be for the homeland and today it is starting to sell the homeland.”

Privatization Push

The Poste Italiane sale marks the second in a programmed series of privatizations. Last November, Rome sold a 25% stake in troubled lender Monte dei Paschi to private investors for €920 million.

The deal was forced by the terms of an EU bailout that required the bank’s privatization. Brussels is also mandating the divestment of ITA Airways, the state-owned successor to Alitalia. However, Lufthansa’s proposed acquisition of the airline is under EU scrutiny over competition concerns.

Giorgetti insists overseas investors are clamoring for Italian state holdings. But experts caution the payoffs will barely reduce the debt overhang.

“These partial privatizations are just a drop in the ocean,” said Nicola Nobile, chief Italian economist at Oxford Economics. He warns they won’t prevent the debt-to-GDP ratio continuing its upward trajectory.

Sluggish growth and rising interest rates have thwarted efforts to pare back debt swelled by generous subsidies. The government hopes asset sales will trim the ratio from 140.2% last year to 139.6% by 2026. Without the privatizations, it would reach 140.6%.

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“The stakes they give up are costly as generally these companies like Eni are well managed and pay good dividends,” said Lorenzo Codogno, former chief economist at the Italian Treasury. “They give up some dividends in exchange for a lump sum.”

Codogno believes the €20 billion target is wildly ambitious and unlikely to be met.

Populist Dilemma

Meloni faces an acute dilemma. Her Brothers of Italy party won power on a populist platform excoriating elite corruption and mismanagement. But she now leads a fractious coalition many Italians view as upholding an unfair status quo.

Walking that tightrope requires demonstrating fiscal responsibility and commitment to reform. However, Meloni also promised voters she would defend national interests against foreign predation.

The forced sales of some cherished state assets undermine that narrative of patriotic stewardship. Hence the government emphasizes its privatization program will be conducted transparently, with no sweetheart deals for insiders.

Meloni argues prudent selloffs can modernize key assets without fully relinquishing state control. She aims to concentrate wholly on core national priorities like defense, policing, infrastructure and social services.

Her administration believes greater private sector involvement will increase competitiveness and efficiency. That should ultimately benefit citizens through improved services, better returns on retained state holdings, and slightly lower public debt levels.

Escaping the Debt Trap

But Meloni has limited room to maneuver. With the third largest sovereign debt globally, Italy remains acutely vulnerable to market sentiment and rising rates.

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Ten-year bond yields dropped below 4% after Meloni took power. But analysts warn prolonged political instability could quickly drive them well above the danger zone of 7% reached during 2011’s debt crisis.

Rome must refinance over €400 billion of maturing bonds this year. Failure to maintain investor confidence could rapidly precipitate a Greek-style crisis. So far, financial markets remain cautiously optimistic about Italy’s outlook.

The privatizations aim to signal Meloni accepts fiscal orthodoxy despite her populist pedigree. But lasting debt reduction requires expanding the chronically stagnant economy while slashing expenditures and boosting tax revenues.

Those painful remedies clash with the spending demands of her coalition allies and risk alienating supportive blue collar voters.

With limited quick fixes available, Meloni seems destined to slowly dilute partisan positions in favor of pragmatic centrism. But that risks fracturing her coalition and animating opponents who accuse her of betraying long-held principles.

Meloni faces persistent suspicions abroad about her far-right roots. Ongoing friction with Brussels over next year’s budget underscores those tensions.

For now, financial markets are taking Meloni’s professed commitment to fiscal responsibility at face value. But with dangers lurking, she has little room for error in steering Italy’s listing economic ship away from the rocks.

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Mezhar Alee
Mezhar Alee
Mezhar Alee is a prolific author who provides commentary and analysis on business, finance, politics, sports, and current events on his website Opportuneist. With over a decade of experience in journalism and blogging, Mezhar aims to deliver well-researched insights and thought-provoking perspectives on important local and global issues in society.

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