Italy’s Ambitious Plans to Recover Billions From Tax Evaders

Italian Prime Minister, Silvio Berlusconi

Italian Prime Minister, Silvio Berlusconi

Italian Prime Minister Silvio Berlusconi raised eyebrows back in 2004 when he publicly philosophized over whether Italy’s heavy taxes made tax evasion a “natural right.”

Now that Italy is staring into the abyss of the euro zone debt crisis, Mr. Berlusconi is no longer waxing philosophical.

Measures aimed at fighting tax evasion are a central plank in Rome’s efforts to balance Italy’s budget by 2013 and appease the European Central Bank, which is currently propping up the Italian bond market.

Billions in revenue will be recovered by cracking down on Italy’s infamous tax-evaders, the government argues, plugging large holes that emerged in Rome’s €45.5 billion austerity budget after the government scrapped politically unpalatable proposals, including tax increases and a pension overhaul.

“The problem is that we have an unsustainable fiscal pressure weighing on the official side of the country”, Industry Minister Paolo Romani said in a recent interview at the Ambrosetti conference in Northern Italy. “We have to get €240 billion in phantom income back into official circulation, which means €120 billion in evaded taxes,” he added.

Economy Minister Giulio Tremonti said he expects to recover from tax evasion €700 million in 2012 and €1.6 billion in 2013, by introducing prison sentences for evaders and by forcing tax payers to provide more detailed banking information with their tax returns.

Speaking at the Ambrosetti conference, Mr. Tremonti noted that only 796 people in Italy declared incomes above €1 million last year while little more than 3,300 people earned more than €500,000.

Analysts and European Union top brass question whether Italy is betting too heavily on its ability to rein in tax evaders.

Similar policies have fallen short of their revenue-boosting goals in other countries, such as Greece, because the effectiveness of anti-evasion measures are hard to predict. Measures such as Italy’s jettisoned plan to levy a 5% tax on people who earn more than €90,000 tend to deliver more reliable results, because they target salaried workers who can’t hide their income from the tax man.

The government, however, argues the fairest way to restore Italy’s fiscal health is to simply to make the chronic evaders pay up, rather than levying heavier taxes on those who have already borne the brunt of Italy’s fiscal burdens.

That rationale offers a new spin on Mr. Berlusconi’s past musings on Italian-style fiscal justice. In his 2004 address to Italy’s tax police, the billionaire media mogul declared:

“There’s a norm of natural right that says if the state asks you for a third of your hard-earned money, the request seems right and you’ll give it in exchange for state services. But if the state asks you for more, or much more, you’re being bullied. Thus, you focus on finding ways to avoid–or even evade–that feel in harmony with your inner sense of morality, that don’t make you feel guilty.”

Europe’s Failure to Stem Banking Crisis Haunts Markets Again

German Logo of the ECB.

German Logo of the ECB.

Four years to the month since the global credit crisis began, European lenders remain dependent on central bank aid, plaguing markets and economies worldwide.

Emergency steps such as unlimited loans from the European Central Bank are keeping many banks in Greece, Portugal, Italy and Spain solvent and greasing the lending of others, while low interest rates and debt-buying are containing borrowing costs. Such aid is needed as concerns about slowing economic growth and sovereign debt prompt banks to curb lending, stockpile dollars and hoard cash in safe havens.

“I’m not sleeping at night,” said Charles Wyplosz, director of the Geneva-based International Center for Money and Banking Studies. “We have moved into a new phase of crisis.”

Central bankers rescued financial firms after the collapse of Lehman Brothers Holdings Inc. in 2008 by providing limitless funding of as long as a year. While they treated the symptom — a lack of ready cash — politicians, regulators and bankers in Europe have proved unable to cure the root cause: some European lenders are at growing risk of insolvency.

The tremors, the biggest since Lehman’s collapse, were triggered by European governments’ continuing inability to stop the sovereign debt crisis from spreading beyond Greece, Portugal and Ireland to question the Italy and Spain. Renewed signs of economic weakness globally and the downgrading of U.S. debt by Standard & Poor’s rekindled concern about the quality of all government debt.

Bank Stocks Tumble

The signs of distress are widespread and mounting: Banks deposited 128.7 billion euros ($186 billion) overnight with the ECB yesterday, more than three times this year’s average, rather than lend the money to other firms. Banks also borrowed 555 million euros from the Frankfurt-based ECB’s overnight marginal lending facility, up from 90 million euros the day before.

European bank stocks have sunk 20 percent this month, led by Royal Bank of Scotland Group Plc and Societe Generale SA. Edinburgh-based RBS, Britain’s biggest government-controlled lender, has tumbled 43 percent, and Paris-based Societe Generale, France’s second-largest bank, dropped 39 percent.

The extra yield investors demand to buy bank bonds instead of benchmark government debt surged to 302 basis points yesterday, or 3.02 percentage points, the highest since July 2009, data compiled by Bank of America Merrill Lynch show. The cost of insuring that debt against default surged to a record today. The Markit iTraxx Financial Index linked to senior debt of 25 European banks and insurers rose to 252 basis points, compared with 149 when Lehman collapsed.

Greek Default Concern

It was the specter of government debt turning toxic that has revived the liquidity crisis policy makers had tried to stop in 2008. As speculation grew that European banks would have to write down their holdings of more governments’ debt after a Greek default, lenders pulled funding to those banks that held the most peripheral debt. It also raised concern European governments would struggle to afford a further bail out of their banks, because both the state and the lenders had failed to reduce their borrowings since the onset of the crisis.

“The debt has been transferred from the banks to the sovereign, but it hasn’t actually been eradicated,” said Gary Greenwood, a banking analyst at Shore Capital in Liverpool. “Until the sovereigns get their balance sheets in order, then these concerns are going to remain.”

Funding markets have seized up as investors speculate that sovereign debt writedowns are inevitable. Banks in the region hold 98.2 billion euros of Greek sovereign debt, 317 billion euros of Italian government debt and about 280 billion euros of Spanish bonds, according to European Banking Authority data.

Euribor-OIS

The difference between the three-month euro interbank offered rate, or Euribor, and the overnight indexed swap rate, a measure of banks’ reluctance to lend to each other, was at 0.66 percentage point today, within 4 basis points of the widest spread since May 2009.

“The central bank is the only clearer left to settle funds between banks,” said Christoph Rieger, head of fixed-income strategy at Commerzbank AG in Frankfurt. “There is a mistrust between banks in general, between regions and with dollar providers overall.”

Overseas banks operating in the U.S. may have cut dollar holdings by as much as $300 billion in the past four weeks as European banks faced a squeeze on funding and sought dollars, Jens Nordvig, a managing director of currency research at Nomura Holdings Inc. in New York said Aug. 18. Dollar assets declined by about 38 percent to $550 billion in the period, he said.

‘More Nervous’

“Banks are becoming more nervous about being exposed to other banks as they hoard liquidity and become more suspicious of other banks’ balance sheets,” Guillaume Tiberghien, analyst at Exane BNP Paribas, wrote in a note to clients on Aug. 19.

By contrast, banks in the U.S. are “flush” with liquidity, loan loss reserves and capital, Goldman Sachs Group Inc. analyst Richard Ramsden wrote in an Aug. 6 report. Large commercial banks combined holdings of cash and securities at large have climbed to 30 percent of managed assets, up from 22 percent at the start of the U.S. financial crisis in October 2007, Ramsden wrote, citing Federal Reserve data.

The Federal Reserve, which provided as much as $1.2 trillion of loans to banks in December 2008, wound down most of its emergency programs by early 2010. One of the few exceptions was the central-bank liquidity swap lines that provide dollars to the ECB and other central banks so they can in turn auction off the dollars to banks in their own jurisdictions.

Trichet, Bernanke

Banks’ woes are again thrusting central bankers to the fore as ECB President Jean-Claude Trichet joins Fed Chairman Ben S. Bernanke and their counterparts from around the world in traveling this week to Jackson Hole, Wyoming for the Kansas City Fed’s annual policy symposium.

After increasing its benchmark rate twice this year to counter inflation, the ECB this month provided relief for banks by buying Italian and Spanish bonds for the first time, lending unlimited funds for six months, and providing one unnamed bank with dollars to satisfy the first such request since February. In doing so, it’s maintaining a role it began in August 2007 when it injected cash into markets after they began to freeze.

Coming to the rescue isn’t easy for the ECB. Its balance sheet is now 73 percent bigger than in August 2007 and its latest bond-buying opened it to accusations that by rescuing profligate nations it’s breaking a rule of the euro’s founding treaty and undermining its credibility. Policy makers are also divided over the best course of action, with Bundesbank President Jens Weidmann among those opposing the bond program.

Economic Threat

The central bank is acting in part because governments have yet to ratify a plan to extend the scope of a 440-billion euro rescue facility to allow it to buy bonds and inject capital into banks. Markets tumbled last week on concern policy makers aren’t acting fast enough.

The funding difficulties of banks was one reason cited by Morgan Stanley economists Aug. 17 for cutting their forecast for euro-area economic growth this year to 0.5 percent next year, less than half the 1.2 percent previously anticipated. They now expect the ECB to reverse this year’s rate increases, returning its benchmark to 1 percent by the end of next year.

The economic threat is greater in Europe because consumers and companies are more reliant on banks for funding than their U.S. counterparts, said Tobias Blattner, a former ECB economist now at Daiwa Capital Markets Europe in London. He says the ECB should eventually try to hand over fire-fighting duties either to governments, who would then inject capital into financial firms, or national central banks, who could provide short-term loans to lenders.

‘Uncharted Territory’

Longer-term solutions may involve the restructuring the debt of cash-strapped nations in a way that doesn’t roil bank balance sheets, potentially in lockstep with a European version of the U.S.’s Troubled Asset Relief Program.

Lena Komileva, Group-of-10 strategy head at Brown Brothers Harriman & Co. in London, said the central bank may have no option but to extend the backstop role it is playing for periphery banks to lenders elsewhere. Refusal to do so would risk a European bank default by the end of the year, she said.

“Markets are back in uncharted territory,” said Komileva. “The crisis is a whole new story now.”

Berlusconi has ceded power to ECB

Silvio Berlusconi in a meeting

Image via Wikipedia

 Union demands detail on deal with ECB over bond-buying

* Opposition says Berlusconi has surrendered sovereignty

* Monti says key decisions now being taken outside Italy

ROME, Aug 8 (Reuters) – Italy’s opposition accused Prime Minister Silvio Berlusconi on Monday of surrendering sovereignty to the European Central Bank after he pledged to speed up reforms in return for help in facing a dangerous debt crisis.

The ECB agreed on Sunday to buy Italian and Spanish bonds to calm markets after a huge selloff last week sent yields climbing to record levels for the euro zone’s third and fourth largest countries, threatening to unleash an uncontrollable situation.

Berlusconi had agreed late on Friday to bring forward the government’s target of balancing the budget by a year to 2013, following pressure from the ECB.

Antonio Di Pietro, head of the opposition Italy of Values party, said Berlusconi had been “dragged by the ear by the EU and international economic institutions” to the news conference where the measures were announced.

“Berlusconi should perform a service to his country for the first time and go,” he said.

“Palazzo Merkel”, read an editorial headline in the left-leaning La Repubblica daily, referring to Berlusconi’s official residence, Palazzo Chigi, and German Chancellor Angela Merkel.

Behind the rhetoric, the criticism from opposition parties and unions reflect broad concern about the apparent deal between the ECB and the government, suggesting growing political resistance.

European sources told Reuters last week that the ECB had demanded Italy fast-track reforms and budget measures to reduce a large debt burden in return for the agreement to buy bonds.

The daily Corriere della Sera newspaper said that the ECB demands for accelerated reforms were contained in a letter President Jean-Claude Trichet and Bank of Italy Governor Mario Draghi had written to Berlusconi.

TECHNICAL GOVERNMENT

In an interview with the newspaper on Monday, Susanna Camusso, head of the CGIL, Italy’s largest union federation, demanded that Berlusconi declare “what conditions were imposed by the ECB for buying Italian bonds.”

She said the text of any communication with the ECB should be published in full “without omissions so that everyone can judge at what point we are with the crisis without the veil of government lies”.

Berlusconi and Economy Minister Giulio Tremonti have so far given very little detail on what they plan to do beyond declaring they will accelerate measures agreed in a 48 billion euro austerity package approved in parliament last month.

But there are growing questions about how much freedom of manoeuvre they really have.

Mario Monti, a former European Commissioner widely seen as a potential head of a so-called “technical government” of experts which some opposition parties want to replace Berlusconi’s struggling centre-right coalition, said the government had effectively ceded power.

In a guest editorial in Corriere della Sera at the weekend, he said a “technical government” was now effectively in place.

“Form is upheld, ministers remain in office. The primacy of politics remains intact. But the principal decisions are taken by a ‘supranational technical government’ and one could add a ‘market government’ spread between Brussels, Frankfurt, Berlin, London and New York,” he wrote.

On Saturday, Berlusconi once again ruled out calling an election before the next due date in 2013 but he has been badly damaged by recent local election and referendum losses and has struggled to control his fractious coalition.

Last week, he promised a comprehensive reform pact with unions and employers to cut red tape, break down regulatory barriers in product and service markets, reduce the costs of government and fight tax evasion.

However no firm details are expected until September.

The CGIL has made it clear that it will not accept a deal in which the bulk of budget savings come from welfare cuts and has demanded a special wealth tax to balance such measures. (Additional reporting by Francesca Piscioneri and Ian Simpson in Milan; editing by Barry Moody/Mark Heinrich)