Hannibal Ante Portas

On 216 BC Hannibal was just a few dozen miles from Rome, having repeatedly defeated its legions in battle. The city was about to be sacked - terror was palpable in the population: the barbarians were at the gates (ante portas). It didn't happen, and some years later it was Carthage itself that was razed to the ground. 

Fast forward: Italy's glories are today renowned all over the world. Venice, Florence, Armani, Ferrari... a slew of luxury brands and pricy tourist destinations have supported an economy that would otherwise be more like Greece than France. Based mostly on those lifestyle sectors, Italy has grown to serious size: its economy is the ninth largest in the world. But under the glitter, Italy has serious problems, making it the Sick Man of Europe.

• Government Debt to GDP at 155%.
• Aged population, third oldest median age in the world.
• Perennial government paralysis, 69 governments since 1945 (soon to be 70), one every 1.1 years. 

Just like in Greece, the adoption of the euro 20 years ago brought down borrowing costs, masking and even exacerbating the underlying problems.  But unlike Greece which accounts for a minuscule 1% of eurozone GDP, Italy comes in at 13%, behind only Germany and France.  Should Italy fall apart the eurozone would fail, and probably so would the EU itself.

How likely is an Italian collapse?  Let's start with this: it's not unthinkable. The ECB is definitely scared enough to propose some sort of mechanism to immunize its debt from market attacks.  I think the ECB has no idea how to accomplish such a task, which is precisely why it has so far abstained from providing any specifics on this mechanism.  The bond market is biding its time, with Italian 10 year bond spreads to German Bunds around 200 bp (2%) up from 90 bp last year. They briefly touched 250 bp last month, causing the ECB's "mechanism" announcement .

With eurozone inflation at 8.60% and Italian 10 years at 3.70% I cannot really imagine how the ECB can immunize Italian debt against a combination of credit and inflation related attacks (Greece is in even worse shape, by the way).  After all, the ECB has to raise rates significantly starting today, if it is to retain even a modicum of inflation fighting credibility.  

My feeling is that Rome will be sacked this time around....

PS Ex ECB head Mario Draghi just resigned as Italy's Prime Minister.  He lasted 17 months.