Fazio, humiliated, still fails to take the hint

Sep 26th 2005
From The Economist Global Agenda

The refusal of Italy's central-bank chief, Antonio Fazio, to resign over a banking scandal has led to extraordinary scenes at an international finance meeting in Washington, in which Mr Fazio was openly mocked by Giulio Tremonti, Italy's new finance minister, and then stripped of his authority to represent the country

LAST week’s imbroglio in the Italian government—in which the respected finance minister, Domenico Siniscalco, resigned and Silvio Berlusconi, the prime minister, came under pressure to step down—was damaging enough to Italy’s reputation. But over the weekend, things only got worse, with Italian officials acting out scenes worthy of an opera buffa at a meeting of the International Monetary Fund and World Bank in Washington.

The story so far: Antonio Fazio, the governor of Italy’s central bank, has been resisting pressure to resign over alleged favouritism in a takeover battle for Antonveneta, a big Italian bank—one of the bids is now the subject of a criminal investigation. Mr Siniscalco, declaring himself “scandalised” at the failure of Mr Berlusconi and his cabinet to demand Mr Fazio’s resignation, quit his job last Wednesday rather than have to sit alongside the disgraced central-bank chief at the weekend’s Washington meetings. Mr Siniscalco’s departure widened the splits in Mr Berlusconi’s crumbling right-wing coalition, some of whose members called for a new leader to be chosen to take the alliance into Italy’s elections, due by next spring.

Finally, Mr Berlusconi did what he should have done far earlier, and made a public statement urging Mr Fazio to go. The prime minister also quickly appointed Giulio Tremonti—a bitter foe of Mr Fazio’s who has already served twice as Mr Berlusconi’s finance minister—to take Mr Siniscalco’s place. Mr Tremonti flew straight out to Washington, where, on his arrival, he openly mocked Mr Fazio by doing an impression of him in front of reporters. Twisting the knife even further, Mr Tremonti then stripped the central-bank chief of his authority to represent Italy on an important World Bank committee, putting a more junior official in his place. At this, Mr Fazio flew out of Washington in a private jet and, no doubt, in a huff.

Even after all this, however, Mr Fazio still seems determined to stay in his job. And there is some confusion over who has the power to force him out. Mr Berlusconi argues that the European Central Bank can remove Mr Fazio from office, since Italy is a member of the euro. The ECB insists that only the Italian central bank’s Superior Council, made up of 13 prominent business and academic figures, can do so. The council is regarded as close to Mr Fazio and is thus seen as unlikely to act against him.

If Mr Berlusconi’s government were strong and popular, and if Italy’s public finances were in good shape, the absurd goings-on of the past few days would be little more than a bit of light entertainment. But the prime minister is lagging in the opinion polls and parts of his fractious coalition are now plotting to dump him to avoid disaster in the forthcoming elections. Worse still, Italy’s finances are in a parlous state, with the government’s debts at a sky-high 120% of GDP and the current budget deficit above the euro area’s supposed top limit of 3% of GDP.

Besides his outrage at the failure to oust Mr Fazio, the other main reason for Mr Siniscalco’s resignation from the finance ministry was his difficulty in getting his 2006 budget approved by the cabinet. His draft, calling for deficit-cutting measures worth more than €21 billion ($26 billion), was rejected by one of the coalition partners, the Union of Christian Democrats, and many in the government are known to feel that such an austere budget would scupper any remaining chance of re-election.

The 2006 budget has to be approved by the government by September 30th, so Mr Tremonti, the new minister, must act quickly and ensure the cabinet’s big-spenders do not get the upper hand. However, it is worrying that the last time he resigned as finance minister, in 2004, he was forced out at the insistence of the far-right National Alliance, another coalition member, which was seeking more influence over government spending—in particular, for there to be more of it in Italy's poor south, from which the party draws its support.

As a postscript to the bizarre scenes of recent days, Banca Popolare Italiana (BPI), the bank allegedly favoured by Mr Fazio in the takeover battle for Antonveneta, has thrown in the towel, selling out to its rival bidder, ABN Amro of the Netherlands. The Dutch bank announced on Monday September 26th that it had agreed to pay €3.2 billion for the nearly 40% stake in Antonveneta that BPI and its allies had gathered, leaving ABN Amro in control of the takeover target. BPI’s erstwhile boss, Gianpiero Fiorani (to whom Mr Fazio had made a controversial midnight telephone call concerning the takeover battle), was forced to resign after a magistrate launched a criminal investigation into the circumstances surrounding the bid. The judge had also suspended BPI’s shareholding in Antonveneta, prompting BPI’s remaining directors to sell out to their Dutch rivals.

With ABN Amro’s victory, Italy has now seen the first foreign takeover of one of its big banks, something that Mr Fazio was apparently very keen to avoid (though he has denied any wrongdoing). That it is, after all, possible to overcome political resistance to a foreign takeover of an important Italian financial institution will provide some cheer to investors. But overall, Italy will come out of this sorry affair with its reputation badly tarnished. Its prime minister has lost credibility and may struggle to survive in office. The rapid turnover in finance ministers bodes ill for the government's attempts to solve its deep financial malaise. What is more, Mr Fazio’s behaviour has wrecked the reputation of the central bank, hitherto one of the country’s few internationally respected institutions.

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