How the moneymakers did what scandals couldn’t…

So, goodbye then Silvio Berlusconi, who at the time of writing has agreed to stand down for the good of his country.

There are many jokes around about Mr Berlusconi and his antics – as a fan of the BBC show “Mock the Week”, I’m sure Frankie Boyle et al have taken the mick out of Berlusconi many times – and he has done much to earn the mockery. Even if the Italians were beginning to wince. A lot.

Here’s the thing. Berlusconi has been a key part of Italian politics a long time. He became Prime Minister for the first time in 1994 after forming his own political party (thanks BBC for confirming that!), and has been on-off political leader of the country ever since. From my memory of Frankie Boyle, Berlusconi has been involved in many controversies and scandals, including being accused of sleeping with an under-age girl at a party, an affair, and having a hair transplant. During a recent court case, I believe Berlusconi even accused the court of using the case as a political motive. Despite all the accusations and the occasional political defeat, the man has been indomitable.

Until today.

It’s too early to say if this is the end of Berlusconi’s reign at the top of Italian politics. At present though the Italians seem to be pretty fed up of him. But the key thing was it wasn’t them diorectly that created the chain of events that lead to him going.

It was the markets, and the interest rates demanded for government bonds.

Some background: Governments borrow money. And when they need money they don’t just call Ocean Finance*, they issue IOUs, called bonds. People then buy these bonds, lending their money to the government, in exchange for an annual (for example) payment for each year the government has their money, called interest. Usually this rate is pretty low, about £1 for every £100 you lend the government. So why invest your money with the government if the rate is so low? Because if you invest in one of the most economically developed countries, it’s usually safe as houses: you don’t get much interest paid to you, but you do get your original investment back at the end.

Or that used to be the thinking. The problem now is governments have issued a lot of these bond thingys, and in countries like Italy there’s beginning to be the feeling that they might not be as safe as the perceived wisdom had us believe. And it isn’t the likes of Joe Bloggs, or even Joey Bloggia, who have lent the money, but large investment companies, hedge funds, pension funds and banks, and because of the sheer number of the bonds they hold, they can dictate the rate they’ll lend the money at. Effectively they’re saying to countries such as Italy: “Give us a higher interest rate, or we want our money back, in full, now”. The interest rate for Italy now is between 6.5% and 7%.

So the Italian government needs to find some money to pay the bondholders the new higher interest. But Italy is running out of cash, so needs to borrow more money to pay back the old money. And it just keeps getting more and more expensive. Somewhere along the line, Italy is going to find no-one wants to lend them any money anymore.

If that’s the case, why are the large investment companies, hedge funds, pension funds and banks charging so much interest if they know it will make the Italian economy worse? One of the reasons appears to be a lack of faith in Berlusconi in sorting this mess out; when a day or so ago everyone thought he was going to resign, the rates suddenly shot down. The bond-holders fear that the Italian leadership cannot fix the economy or keep paying the bond-holders back, so they want a bonus to keep their money tied up in Italy, in recognition of the risk of losing some of their cash later. What happens later is not their concern in the right-here-and-now life financiers lead.

Effectively, their statement in the no-confidence in Berlusconi’s leadership carries more weight than the voice and growing shame of his own people, the jokes of satirists around the world, and even the cries of his own opposition. Whatever his personal reasons for standing down now, after a day of votes in the Italian parliament, the growing bond rates must have been a key point.

So does it matter that it’s the financiers, rather than the people, who have made Berlusconi go? Absolutely. It represents, in my humble opinion, of the ever-increasing transfer of global control from the democracy ideals to one of investocracy**, leadership by investors. I’m not sure that’s a world I want to live in, where political leaders come and go based on effectively bribery and manipulation by the bond markets. Unfortunately I can’t see an easy way on how this is going to change anytime soon, or even concoct a non-emotional reason why this is bad. But it feels like our ideals and way of life, our self-determination in our governing system is beginning to be at risk, and I’m not sure I like that one bit.

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*Other loan companies are available.

**Yes, you heard that word hear first!

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