Giuoco Piano? Not any more!

Posted on Posted in Newsletters

I thought I should write a quick note after today’s global market swoon. Forget Greece; it’s now all about Italy. And I’m tired of hearing about (and writing about) Europe. But the good news is that the endgame is likely to be very near.

Those of you who play chess will recognize “giuoco piano” as a common chess opening; translated from the Italian, it means “quiet game.” We’re now a long way from the opening, and things aren’t so quiet in Rome anymore. But I don’t expect the Eurozone crisis to go on much longer.

Why not? Italy is not Greece. It’s huge, so a “rescue” is out of the question. Everyone knows that, including the Italians and their would-be saviors, the Germans, as well as investors worldwide. While a Greek default would be manageable and is, in fact, being managed as I write, an outright default by Italy would be a financial catastrophe and mean the end of the Euro. And that is why I’m certain the politicians and financial elite in Europe will never let this happen.

But Italy is not Greece in many other ways. It has a diverse and functioning economy, lots of industry and leading-edge technology, and quite a bit of capital. In other words, unlike Greece, it can actually service its large debt load. All that needs to happen is for its government to decide that baby steps are no longer an option: Italy must do something bold to end the crisis. If the yield on their 10-year bonds wasn’t enough of a clue (it hit 7.25% in Europe today), then the stock market’s reaction to the jump in bond yields certainly hammered it home.

People seem to have lost confidence in the ability of Italian politicians to do the right thing. But it would be premature to write off Italy. You see, the Italians have had several fiscal crises in the past, and they always seem to take the required actions at the very last minute. (This article gives a useful perspective: http://www.boston.com/news/world/europe/articles/2011/11/09/analysis_italy_nation_of_last_minute_rescues/.)

Sometimes a country has to reach the point of no return before acting in its own best interest. Italy is nearly there, and soon will have no choice but to take the steps needed to regain the market’s confidence. Like the budget deal in the US, it will likely come at the 11th hour, after nearly everyone has given up hope. Yet Italy will rise again (as will the stock market). I don’t know exactly when, but my 35 years of investing tell me that it will likely be very soon.

Salute!