Monday, 24 February 2014

Men in a hurry

This article was published in The Malta Independent on Sunday - 23 02 2014

It is easy to label Matteo Renzi as a man in a hurry. He has brought new energy and determination to the Italian political scene. Italy desperately needs a true leader with a sense of urgency and many consider Renzi as Italy’s last hope.

Italy would have had a stable government if, before the last elections this time last year, the PD had chosen Renzi as its leader rather than old-school Bersani who managed the impossible, wasting a substantial poll lead, and practically single-handedly losing the election of February 2013. This condemned Italy to an unstable government under fellow PD Enrico Letta who had to organise a gruelling grand coalition with Berlusconi’s party (before the latter split up).

Politically, it would have suited Renzi to allow Letta to stay in position for a few more months to continue cleaning up Italy’s fiscal mess and until a new electoral law was in place to ensure that the electoral process could deliver a clear winner capable of forming a stable government.

But for someone in a hurry, Letta works too slowly, makes too many compromises and shows insufficient urgency for getting things done. Bubbling to show that he can do for the country what he has done in Florence; that he can modernise the country and liberate it from the clutches of lobbies and vested interests; Renzi took the plunge and pushed Letta aside positioning himself to become Italy’s youngest ever Prime Minister. Political programmes that normally translate into action plans spanning years, which never get done as Italians governments rarely survive that long, Renzi has to execute in terms of months.

Renzi is business friendly but unashamedly left opinionated. He knows that national interest cannot afford the distraction of early elections. National interest demands focus on efforts to regain competiveness. Italy needs to compensate the time lost as a result of politicians’ in-fighting that compromised the national interest to serve their own constituency.

In many ways he is a replica of our Prime Minister Joseph Muscat. He is even younger and more ambitious, and Renzi has a harder task as he does not have the comfort of a solid parliamentary majority that Dr Muscat enjoys.

But in forcing himself to become the third Italian Prime Minister in a row without commanding a direct electoral mandate, Renzi is taking a grave risk.

Unless he manages to deliver within months where others have failed for years, he could dent the aura which currently depicts him as the man that can save Italy and risks becoming a historical footnote in the long list of Italy’s post-war unstable governments.

He has a tall order: changing the electoral law, changing institutions, including the abolishment of the Upper Senate, reducing cost of doing politics by eliminating layers of regional and local government, restructuring the judicial system, reducing the cost of employment and above all infusing fresh confidence to attract new investments that create jobs and stimulate economic growth.
Being in hurry could be a virtue as much as a vice. Renzi must make it a virtue, for Italy and for Europe. Europe cannot be a stable place if Italy stays fickle. Renzi is Europe’s best hope to help smooth out the difference between core and periphery EU.

Renzi cannot do it on his own. He needs particularly the help of another Italian in Frankfurt, Mario Draghi, the President of the European Central Bank (ECB), the only supra national European organisation that can operate in the name of the whole euro area without needing approval from national parliaments.

Renzi needs Draghi to maintain his ‘whatever it takes’ pledge to keep the cost of borrowing for Italy’s sovereign debt low and close to Germany’s, the best in the class. He needs Draghi to use his soft but effective power to get Italian banks recapitalised and healthy so that they can resume operating as normal banks extending credit to SMEs and small industries that create jobs and generate growth. The absence of such effective credit mechanism is forcing many Italian industries, even those with export potential, to give up and close doors. Only this week, Italian industrialists felt the need to protest on the streets, an experience normally reserved for trade unions. But with unemployment as high as it is, labour seems to have lost even the spirit of protesting.

Renzi deserves European support and hopefully Germany can understand that he represents the best hope for the EU to find its path back to an ‘ever closer Europe’ in the context of economic growth and social solidarity.

I hate crossing swords with Mr Anthony R. Curmi, a formidable and independent defender of the interests of former shareholders of the National Bank of Malta. I hate it, as Mr Curmi is a fine gentleman and I owe him a lot for my career as in the early years he was my boss and my mentor at Barclays/ Mid-Med Bank.

In essence, there is one point of disagreement between us. While Mr Curmi promotes an out of court settlement (Compensation for ex-National Bank of Malta shareholders, TMIS, 16 February 2014), I maintain that at this late stage justice can only be served if based on a court judgement. The argument that this will take long to come no longer holds. Recently, the Judge delivered a preliminary sentence in three court cases and one expects that the same Judge will now deliver judgement to quantify the compensation due. Having come to this stage we don’t need another one in a hurry.

Any consideration for an out of court settlement has at least to await the award of compensation by the first court and then the parties will have to decide whether it is in their interest to negotiate or to appeal.

I think this chronological order of doing things is important because when it comes to quantification of compensation, the judgements, all by the same Judge, send what prima facie seems conflicting messages.

In one sentence (Court case 282/1977/2), the Judge says:

“The bank’s administration at the time declared that the shares had lost all their value. They said this to the shareholders and repeated same in court under oath. They said as much after consulting the best legal minds and in full knowledge that the bank had assets and in spite of having huge reservations on the way government treated them in those crucial hours. It must be stated that it was the bank’s own administration that started procedures for court approval for shares of particular shareholders to be transferred to government without compensation. The Court holds no doubt that these declarations were not made lightly, or with ulterior motives or to gain time but were declarations made on the basis of the critical situation of the bank that was not in a position to continue operations in those conditions at the edge of insolvency, or at least, in the state of illiquidity that it found itself in.
“The declaration that the shares had no value was one of the reasons why the Civil Court Second Hall authorised transfer without compensation to government of shares in name persons who had no civil capacity to act without court protection and safeguards. In other words, the decision by that court was a judicial pronouncement of the situation as it was at that point in time and not an impression that was formed much later.”

Yet in the other two sentences, the same judge states:

“Although it is true that at the time the shares no longer had a negotiable value because of the state of illiquidity of the bank, there is no doubt that the bank had substantial assets that exceeded the liabilities that may have existed. This was (net) value that was worth and proved its worth in the administration of successor organisations to the bank’s business. It was value that left the hands of the shareholders and for which they received no compensation.

In defining the compensation, the Judge will have to give a meaning to these conflicting opinions. Basically, these questions have to be answered:
  1. Can the court depart from the normal commercial practice of value being established at the point of the transfer irrespective of what happens after? 

  2. Whereas in the first quoted extract the Court acknowledges that the bank may have been on the verge of insolvency, in the second quotation it speaks merely of illiquidity. Does the Court appreciate the difference between a state of illiquidity and insolvency?

  3. The difference between insolvency and illiquidity should have a great bearing on establishment of compensation due. If the bank was insolvent, the bank could not have been saved without fresh capital and as no one was prepared to put up fresh capital other than the government, then the government had the right to set its terms that the shares were valueless. If the bank was merely illiquid no fresh share capital was necessary and the Central Bank could have saved the day by operating its lender of last resort function.

  4. Is the court prepared to usurp and overrule the role of the Central Bank in determining that in the circumstances then prevailing that the bank was insolvent not merely illiquid, so much so that it was not supported with lender of last resort liquidity?
I await the full court decision before making final analysis of its fairness and suitability.

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