By Stefan Borghi, Research Analyst
February has seen major corruption scandals erupt at some of Italy’s most important companies, including oil giant Eni S.p.A., Finmeccanica S.p.A., and Banca Monte dei Paschi di Siena, Italy’s oldest bank. There could be major political implications as a result; the Italian government controls Eni and is a substantial shareholder of Finmeccanica. In addition, the government has invested billions of euros in Monte dei Paschi in order to keep the bank afloat. While these recent events do not bode well for current Prime Minister Mario Monti in the country’s February 24-25 elections, they may not impact the international investor as much as one might think.
State-owned Eni has been included in an investigation of subsidiary Saipem S.p.A. regarding possible corruption involving a natural gas pipeline project in Algeria. Finmeccanica, 30%-owned by the Italian government, recently deposed its CEO after he was arrested as part of an investigation into alleged international corruption. Monte dei Paschi is currently being investigated for its 2007 acquisition of Antonveneta from Santander, as well as a series of loss-making derivative and structured finance trades dating back to 2006-2009.
These scandals have created financial and political firestorms leading up to Italy’s February 24-25 elections and could not have come at a worse time for current Prime Minister Monti, who had been credited with restoring the country’s credibility after the scandal-plagued regime of former Prime Minister Silvio Berlusconi. That is, until recent events.
A former European Commissioner, Monti was appointed to lead an unelected government of experts to save Italy from financial crisis in late 2011. He is favored by the Catholic Church and the business establishment, as well as international investors, who lauded his still-unproven “Save Italy” plan to change the country’s corporate culture that allowed for cross-shareholdings and the financial and corporate elite to influence the operations of Italy’s most important companies.
It will be the tax increases and spending cuts, widely unpopular in Italy that could ultimately lead to Monti’s downfall, not the recent turmoil at Finmeccanica, Eni, and Monte dei Paschi. The Italian public does not seem to mind the opprobrium, as evidenced by yet another run for office by Berlusconi, whose career has been plagued by political, corporate, and personal controversy. Berlusconi has been Prime Minister of Italy for eight of the last 12 years so there is a familiarity with the charismatic billionaire, as well as the inevitable discord that he brings. This familiarity, coupled with Berlusconi’s promise to cut taxes, hurts Monti’s chances even more, to say nothing of current center-left front-runner Pier Luigi Bersani. Bersani has been a supporter of the technocratic government of Monti and has promised to pursue Monti’s commitments to the European Union for greater fiscal responsibility, while at the same time working to create more jobs in Italy. His platform includes increasing employment for women and young people, who Monti infamously told to forget about finding a steady job; better access to research and development funds; lower labor costs for small and medium industries, the backbone of Italy’s economy; and harsher anti-corruption laws.
Things look bleak for Monti, who in January hired Barack Obama campaign guru David Axelrod to spearhead his own re-election campaign. However, things look even bleaker for the investors of Eni, Finmeccanica, Monte dei Paschi, and other Italian companies who are hoping to see changes. Despite initiating various reforms aimed at improving Italy’s corporate structure, Monti has ultimately been unable to change the status quo and rid corporate Italy of the scandals that have plagued it for decades. Therefore, if re-elected, there is no reason to believe that things will drastically improve, if at all, under Monti. If Berlusconi, who recently implored Italian companies to continue to engage in bribery lest they fall behind international competition, is able to win over voters with his promise to cut taxes and their near-comfort level familiarity with him, the country may wind up taking a step backwards. Berlusconi’s business and political practices over the years have perpetuated the problems of corporate Italy rather than fix them. Finally, if Bersani is elected, which many experts are predicting, it will be difficult for him to improve things, as Monti has proven during his brief, albeit eventful tenure.
No matter who wins the upcoming election, one thing is certain: over the years, Italians have shown that, in general, they do not mind scandal-plagued government or corporations. Italians have been dealing with political and corporate disgrace for decades and seem to have developed ambivalence to this climate. This is evidenced by the fact that Berlusconi has been Prime Minister for eight of the last 12 years despite the plethora of problems that have followed him. This ambivalence may just be the result of faith lost in the Italian government. No leader, not even Berlusconi, has been able to alleviate the fragility and infamous bureaucracy of Italy’s government or improve its inefficient court system and stringent labor laws, all of which scare away foreign companies, thus perpetuating the stagnation of Italy’s economy. All of these obstacles will be too much for Italy’s next leader to overcome, whether it be Monti, Bersani, or Berlusconi. As a result, investors can continue to expect more of the same – scandals and poor financial performances at many Italian companies for the foreseeable future.