Sub-prime crisis Italian style? Part 2
A short time ago I wrote about an interesting conversation I had with a union rep while I was down at the 442 pub. This guy told me about the number of people who were struggling to meet mortgage payments.
Well, guess what? Mario Draghi, the current head of the Bank of Italy, has made a couple of interesting statements recently. First, he stated that Italian salary levels are low compared to other countries in the European Union - 25% lower than French salaries and 20% lower than salaries in the UK. Then, Mr Draghi made an even more interesting observation. He commented at a recent congress that Italians are going to find it difficult to meet mortgage payments.
Sub-prime crisis Italian style anybody? It sounds as though there is a possibility, despite Italian lenders being legally restricted to ensure that repayments do not exceed a third of monthly income.
However, even though Mr Draghi is quite rightly ringing alarm bells, he is missing something. That something is that great efforts are being made to ensure that Italians fall further and further into debt, much in the same way as Americans and Britons have done.
The question is why is this the case. The answer is quite simple. There is an enormous amount of money to be made from servicing debt. If you have no debt, you do not owe anyone interest, and lenders cannot maximize interest related income. This market requires some stimulation - more people need to be put in a situation where they need some form of finance, be it short or long term. By keeping salary levels low, the market for finance automatically grows as the cost of living rises. And prices in Italy are moving up, much to the delight of lenders, I’m sure, and more and more Italians are being forced into seeking finance. As I have observed before, lending institutions are springing up almost daily in Italy, because they know that they stand to make millions out of finance related interest payments.
Italians are wise and effective savers, not to mention their being rather adept keeping their tax liability at a minimum, but I wonder what the situation will be in two generations time. Will Italy see house repossession levels on the same scale as the US and UK? Time will tell.
Of course, I am but a mere sprat in the big sea of things, but Mario Draghi is a whale, and while I may be wrong, I doubt he is.
Sub-prime crisis Italian style?
By now, most of the world has heard of the crisis in the sub-prime mortgage market in the United States. Many will also know about what appeared to be the near collapse of a major British lending institution, the Northern Rock.
But what about the possibility of a similar crisis occurring in other countries, Italy for example?
On the surface, it does not look as though a sub-prime crisis could happen in Italy. After all, it would seem that Italian lenders are more prudent than their State side counterparts. Further, Italians do not generally take out huge mortgages as many property purchases are funded from family resources, inheritances and the like. All seems to be sound, and risk levels appear to be low. One hopes so, anyway. The other evening though, I learnt something from someone which made me wonder whether Italy was as invulnerable to a sub-prime crisis as I first thought.
The other day, I was chatting with a union rep while having a pint down at the 442 pub. Now this chap, who works for a major multinational in Italy incidentally, told me that he knows of a few cases in which people who earn little more than one thousand Euros a month, have been managing to take out mortgages with monthly repayments as high as seven hundred and fifty Euros a month. These individuals had been coming to him because they were finding it very difficult to meet the repayments. And he gave me the impression that the numbers of people who were finding themselves in difficulties was increasing. My initial reaction was, ‘How could a lender hand out mortgages with such high repayments to people on such a low salaries?’ In answer, I was told that when going through the mortgage application process, these people intimate that they have access to enough funds to be able to cover their debt, despite the high repayments. And this mere intimation seems to have been enough to for them to have secured mortgages. This is when sub-prime crisis alarm bells began ringing in my head.
Now, even though a potentially worrying situation could exist in Italy, I have to admit that I really have no idea as to the extent of this reckless lending, and, to be honest, whether any reckless lending has indeed been taking place. I am after all, basing my suppositions on a chat with one union representative.
However, perhaps this situation needs to be looked into, so my worries can be proven to be unjustified, as I hope they are. And preferably someone should start investigating this before it is too late.
I hope that the situation in the US has already got lenders here checking and double checking the level of sub-prime type lending in Italy is still at manageable levels. Time, as always, will tell.
Pumping out the scams
The local news here in Lombardy has just reported that the Guardia di Finanza, the Financial police, have uncovered a large scale scam involving quite a few service stations, 24 in all. This was a high-tech attempt at fiddling. What the unscrupulous were doing was hacking in to the software on the computers that ran the pumps and ‘adjusting’ them so that hapless customers got less then they were paying for. Nice. In the past, similar fiddles were reported but none were as sophisticated as this one.
I wonder how long it will take these people to work out a way of quickly adjusting their pumps so that they can get by the checks, which are low tech and involve measuring the output of a pump and comparing it with the price and quantity displayed.
On the subject of scams, Italians have always, by and large, been good at managing their cash, so much so that things like bank loans, mortgages and overdrafts were almost unheard of. Not any more. Lending companies are springing up all the time and many advertise on the telly. The situation here is still very different from the situation which existed in the UK ten years ago, when I was able on one occasion to organise a loan in about one and a half hours flat. Try doing this in Italy now and getting a reasonable rate of interest. However, as I said before the plethora of new companies offering quick loans is a sign that things are changing. This causes me to ask the following question. Are the rich and powerful here trying to send Italians down the easily available credit road which has already been occupied by some time by the USA and UK? I think, yes. Why?
Well, if you are rich, very rich, like the Italian prime minister, for example, what is one of the easiest ways of making even more cash? The answer is lending it to others, of course. Mortgages, so much a part of life in the UK, are a great way of earning an enormous amount of interest and the whole thing is secured on that most secure of investments, bricks and mortar. So, imagine, you are rich and powerful and you just happen to end up being prime minister. Now, how could you reduce the population’s disposable incomes enough to ensure that they need more credit? Easy! You increase taxes and work to ensure that the cost of living starts growing out of all proportion to the growth in pay. As a strategy it’s a winner. It can’t lose, especially when you have the power to make laws to keep yourself on the right side of legality. Indirectly, of course, the blathering fools which go to make up the opposition will help you keep power, because they have no way of matching the swarve and sophisticated marketing of you and your ‘political’ company, sorry, party.
Is this happening in the living museum? Well, I’m not sure, but I have my suspicions. I will restrain myself from mentioning the ‘N’ word, again.
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September 8, 2008
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September 8, 2008
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The 442
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