Italy on Sale, Finland Threatened as ECB fights Germany on Disinflation Fix

Finland has lost its most recent credit rating due to eurozone instability and more Italian assets are being sold to Chinese investors as instability accelerates in the European Union and the ECB fails to convince Germany of the need for quantitative easing.

Finland has lost its most recent credit rating due to eurozone instability and more Italian assets are being sold to Chinese investors as instability accelerates in the European Union and the ECB fails to convince Germany of the need for quantitative easing.

Acrimony between the European Central Bank and German politicians is mounting, as the ECB sees greater economic justification for a widespread asset-backed purchasing program akin to the Federal Reserve’s quantitative easing program. While peripheral European nations and economist observers are urging the ECB to take aggressive action, German politicians and economists are urging restraint.

At a recent press conference in Washington, ECB President Mario Draghi said the ECB would use asset purchases to increase its balance sheet that would, in turn, bring eurozone inflation above its current 0.3% rate. Draghi said the ECB would target a purchase of about 1 trillion euros in the hopes of keeping the bank’s balance sheet at levels seen at the beginning of 2012.

Deutsche Bundesbank head Jens Weidmann immediately attacked Draghi’s assertion by saying the ECB had no target at all. “I don’t need to explain to you that there has been communicated a certain target value for the balance sheet,” he said.

On the scuffle, an ECB spokesperson told reporters that policymakers often have differing views on the appropriate course of action. The Bundesbank has said that it opposes the purchase of asset-backed securities in September and October.

Finnish Credit Victim

With increasing vitriol and tension between eurozone members and Germany, Finland lost its AAA credit rating late last week, with Prime Minister Alexander Stubb saying that it could take the Finnish economy as much as four years to regain that rating. Stubb also said he is targeting social, pension, and municipal agreements. “I think this was a good wake-up call to all of us, and those who did not understand that our economy is not in a good shape, should have woken up at this stage,” said Stubb.

The Nordic nation’s famously generous social welfare systems are under threat as foreign creditors cite an aging population and a prolonged period of stagnant economic growth as signs that the nation’s creditworthiness could be threatened in the future. 

Despite the warning, Finland still has one of the lowest debt levels in the developed world. Currently, the nation has a public debt to GDP ratio of 53.5%, substantially lower than the eurozone level of 92.6%. The United States has nearly double Finland’s debt to GDP ratio, at 101.5%.

Chinese Feast on Italian Assets

With higher debt loads and the threat of deflation, European assets are seen as particularly affordable for foreign buyers, especially money-rich emerging nations looking for secure assets that cannot be seized by politically unstable regimes. Particularly, Bloomberg reports that more Chinese investors are buying assets in Italy as the Mediterranean nation faces its third recession since 2008 and the real risk of permanent underemployment and high youth unemployment.

According to Bloomberg, Chinese investors have purchased $3.4 billion in Italian assets, with Chinese purchasers of real estate, small businesses, and large Italian firms looking for bargains that may not incur high rates of return, but help diversify holdings away from the powerful Chinese government. While some wealthy Chinese buyers are seizing up Italian trattorias, shops, historical villas, and Italian antiques, larger investors are buying stakes in iconic Italian companies. The People’s Bank of China has purchased shares in Fiat SpA and Assicurazioni Generali SpA.

One source cited by Bloomberg said they have seen Chinese investments in Italy grow by 50% in one year. Some analysts believe the demand from Chinese investors for Italian assets will accelerate even further if deflation causes European investors to panic and sell off more assets.