🔴 Will Italy Be the Next Country to Leave the EU? (w Steve Diggle & Grant Williams)

GRANT WILLIAMS: The second leg of our journey
will take us through the Tuscan countryside from Florence to Siena, home of the world’s
oldest and possibly most troubled bank– Banca Monte dei Paschi. STEVE DIGGLE: So Siena– where we’re about
to arrive, when this traffic lets up– GRANT WILLIAMS: Hopefully. STEVE DIGGLE: –not a hugely important city,
though a very beautiful one– but in medieval Italy, one of the great trading centers and
Florence’s great rival for hundreds of years as a destination for merchants, and business,
and political influence. So they fought each other for centuries–
2 and 1/2 centuries, at least, on and off– in this very medieval way, which was– you
don’t actually do any of the fighting yourself. GRANT WILLIAMS: No. STEVE DIGGLE: You hire a mercenary– GRANT
WILLIAMS: Mercenary. Yep. STEVE DIGGLE: –made up of the scum of Europe–
English– –German, Swiss, Belgians– to do the fighting for you. And these are, really, quite small armies
but Siena didn’t actually formally come under the control of Florence until the 16th century,
when it was actually controlled by the Hapsburg Spanish. And they owed a great deal of money to the
Medici banking house. GRANT WILLIAMS: Didn’t everybody? STEVE DIGGLE: So the Medici acquired Siena
in a debt-for-equity swap. 2 and 1/2 centuries of fighting, but they’re
actually acquired in a financial transaction. And Florence having aborted, essentially,
in a debt-for-equity swap, then controlled the growth and development of Siena in the
traditional way– by imposing punitive taxes on the place, so that Florence was a much
better place to do business than Siena. And so Siena never grew, which has turned
out to be a great blessing for it. Everything’s still intact. Why is everything intact? Because no growth. However, despite being only 55,000 people
these days, they still have to have their own divisions, which they do. And you will find an interesting story about
the subdivisions of Siena, which I’ll tell you when we arrive. GRANT WILLIAMS: This is beautiful. Look at this. STEVE DIGGLE: Look at this. Look at this. Here’s a place with a population of, when
they built this, 80,000, 100,000. I mean, it’s a small town most anywhere else
in the world, but they thought they needed this. The scale of the ambition is amazing. So we’re in Florence, and now we’re in Siena,
only a few miles apart– mortal enemies. To this day, people in Siena still don’t like
Florentines. But when Sienese get together, they’re not
united. They’re part of these 17 contrada– 17 contrada. So the population of Siena these days is like
55,000 people– GRANT WILLIAMS: Is that all– 55,000? STEVE DIGGLE: Yeah. Florence ensured that this place would never
flourish, by having differential tax rates, which is interesting, right? Because you can fight someone for 2 and 1/2
centuries but if you really want to restrict it, you impose taxes on it– so drove all
the business to Florence. Florence flourished. Siena stopped developing. But when they’re together– they’re not united,
the Sienese, unless they’re fighting someone else. When they’re together they’re down to 17 different
districts, or the contrada, and that’s erasing the Palio– well, nine of the 17 qualify to
race here. And once again, this isn’t an affectation. These contrada– they really dislike each
other. GRANT WILLIAMS: Right. So let’s do the math. There’s what?– 3,000-odd people in each contrada. And I’m sure when the contrada get together,
they probably don’t like each other, either– probably family disputes, or something. But anyway– Giuseppe– we’re not talking
to him. STEVE DIGGLE: It’s a perfect and beautiful
representation of this Italian genius for division and internal fighting. So the contrada get together to fight the
Florentines. And then, I suppose, at some level, the Tuscans
get together to fight the Neapolitans– GRANT WILLIAMS: The — STEVE DIGGLE: The Milanese–
and then, rarely, rarely, do the Italians get together to fight someone else. Well, I mean almost never, because it wasn’t
a country that was reunited until 1870. GRANT WILLIAMS: Well, you see, I remember
when I first read that. And I had to go back and read it again. So I’m thinking, Italy has been a country
for less time than the United States, as we understand it– STEVE DIGGLE: About half the
time. GRANT WILLIAMS: Half the time– and yet, there’s
so much history here. So it’s such a contradiction. We’re in a place that feels like it’s just
stopped in time. STEVE DIGGLE: Yes. GRANT WILLIAMS: Just, I mean, if you look
around, it’s remarkable. Take away the awnings and the plate glass
in the front of the store– I mean, we’re centuries past. STEVE DIGGLE: Think about the wealth of this
place though. Population– let’s say 100,000 in the 14th
century. They built this. I mean, look at it– the ambition, the wealth,
the scale of the audacity. Most towns of 50,000 to 100,000 people do
not need a square this big or a municipal premises this big. So you go from a situation of enormous confidence,
optimism, wealth, to a place that really doesn’t grow for 600 years. GRANT WILLIAMS: Right. But when we talk about growth, which is a
big part of the debate about Europe and Italy, this idea that the Italian economy is smaller,
still, than it was in ’08, whereas other economies have grown– we think of this in a small way. But we’re sitting in the middle of somewhere
that hasn’t really grown for centuries. So that’s a possibility. It can happen. STEVE DIGGLE: But radical ecologists would
say, this is a great example of what happens when you stop growing and you preserve things. And they remain pristine and beautiful. GRANT WILLIAMS: But we get this idea of growth
on a world scale, where we’ve seen there was always either a country– a significant country
or region that was growing at a decent clip– 6%, 7%, 8%, 10%, 12% in Italy or China– and
the fact you’ve had that one significant– STEVE DIGGLE: Well, the reason you and I were
in Asia was because that was where the growth was. Right? I mean, you had half the world’s people, and
it was growing rapidly– first of all, Southeast Asia, then North Asia, then China– series
of huge boosts to global growth from hundreds of millions of people entering the global
workforce– becoming consumers– GRANT WILLIAMS: –and sucking in resources, sucking in labor–
We don’t seem to have that now. With China at 6 and 1/2% now– STEVE DIGGLE:
They say. GRANT WILLIAMS: They say. They say. STEVE DIGGLE: I think it’s probably more like
4 and 1/2%. GRANT WILLIAMS: Even so– but without that
engine of growth, are we entering a world where 2% to 3% is good– which it feels to
me we are, certainly in the West. And if so, what does that mean? What does that lower for longer mean? Because here, it means nothing. It means life goes on. And it means– this place is a moment in time
that people from all over the world want to come see, including the massive group behind
us that’s just emptied out of a coat somewhere. But what happens? Is that where the world is going to be now? STEVE DIGGLE: There’s no problem with growing
with 3% a year. Right? I mean, if you grow at 3% a year, it means
your economy doubles every generation. That’s not bad. GRANT WILLIAMS: No. It’s not. STEVE DIGGLE: On long-term historical perspective,
that’s pretty good, as long as you don’t have a massive war, or famine, or disease that–
GRANT WILLIAMS: Or– STEVE DIGGLE: –wipes you out. GRANT WILLIAMS: –unsupportable debt. STEVE DIGGLE: Ah, yes. Well that’s another matter. I mean, the only way that that sort of growth
becomes problematic is for two reasons. One, if you’re already very poor, that’s going
to be bad. Right? So if you’re stuck in a poverty trap, and
you’re growing slowly, then that’s going to cause a real level of dissent. The other thing is, if you enter a period
of low growth– and Italy is a great example of this– with too much debt– because the
only way you really ever truly dissolve debt is inflation or growth– GRANT WILLIAMS: Correct
STEVE DIGGLE: –neither of which we have. GRANT WILLIAMS: Right. So what does that mean for Italy? STEVE DIGGLE: So if you enter a period of
time where your demography is not constructive– Italian demography is not constructive– clearly,
immigration is highly problematic. What does that mean? It means that Italy and Japan obviously have
the worst– some of the worst– demographics in the world. And they both have huge levels of sovereign
debt. Right? In Japan, it’s now over– what? 200% and– GRANT WILLIAMS: 240%, I think it
is. STEVE DIGGLE: 240%. Italy’s– what? GRANT WILLIAMS: Here, it’s 130%? STEVE DIGGLE: 130%, yeah. So you’ve got an economy that’s still stuck
around $2 trillion. Sovereign debt’s around 2.4. And growth is, well, nil, for a decade. GRANT WILLIAMS: Yeah. Right. And that’s problematic. And– STEVE DIGGLE: That’s the problem. GRANT WILLIAMS: Exactly. STEVE DIGGLE: That’s the problem– servicing
and eventually maybe even possibly paying down the debt– that’s not likely to happen
any time soon– becomes increasingly problematic. That debt is what traps Italy inside this
box with the EU, because Italy needs to be a member of the European Union in order to
have low rates in order to service– it’s unserviceably high debt. Right? That’s why Quitaly is not going to happen. They can’t afford to because rates would double. That would mean, effectively, the entire Italian
budget would go to service of the debt. GRANT WILLIAMS: But if they do that, and they
go back to the lira, is there a possibility of a reset of some sort? I mean, obviously, it’s going to ripple. There’s going to be– STEVE DIGGLE: This is
not– GRANT WILLIAMS: — STEVE DIGGLE: –something that Italy hasn’t been through before. Not without a default. GRANT WILLIAMS: Right. No. STEVE DIGGLE: Not without a default. GRANT WILLIAMS: Exactly right. STEVE DIGGLE: But that’s happened before–
GRANT WILLIAMS: Sure. For it to happen to a G7 country would be
astonishing, but is that a way out for Italy? STEVE DIGGLE: It’s a way out, but it’s a bit
like dropping the H bomb, isn’t it? GRANT WILLIAMS: Yeah. But if you’re prepared– if we are getting
down to the negotiation stage of this– if you’re prepared to put that on the table–
which, let’s face it. The Greeks were. The Greeks put that on the table– fudged
it, obviously. We don’t know what kind of backroom deals
were made with the Greeks or backroom pressure put on them. So there’s no– didn’t seem any deal made. But they got the bailout they needed. If you’re prepared, which the League and 5Star
claim to be– to go to any lengths to stick it to the Europeans– could we see that as
some kind of standoff, do you think? STEVE DIGGLE: I think the fact that, as you
mentioned, Italy is a G7 country– maybe it’s someone in Congress, it is. The pride that Italy has in itself is on a
different level to the Greeks, I think. I mean, there are certain similarities, but
there’s some very important differences. I mean, this place is a testament to the pride
the Italians feel– GRANT WILLIAMS: Sure. STEVE DIGGLE: –in themselves and their achievements. So I think it’s unlikely to end up there. But in a sufficiently antagonistic situation,
given the domestic situation in Italy and the increasing frustration of Italians with
Brussels, I don’t think it’s impossible. So if they want to have more fiscal stimulus
and some way to break out– if they break out, the monetary rates go higher. So that’s the trap. GRANT WILLIAMS: Well, this is why sitting
here is so apposite to talking about this– because at that point, they necessarily, I
guess, all become Italians again. And Italy becomes one contrada inside Europe. And the Grillos and the Northern Leagues of
the world are fighting for their contrada in amongst this wider scope. And if you galvanize Italians into that kind
of frame of mind, who knows what you can achieve? STEVE DIGGLE: Yes. Possibly. I mean, clearly, that’s a possibility. It strikes me as pretty unlikely. I mean, one of the other Achilles’ heels that
Italy has is not just its sovereign debt– it’s this banking crisis, which is one the
reasons we should come here to Siena– because the banks are in a very poor state and have
remained in a poor state. They never really recovered since 2007. They’ve been in a state of either denial or
denying how bad the problem is, but against total borrowings of $2.2 trillion– about
one times GDP– approximately 11% to 12% of that is nonperforming. GRANT WILLIAMS: Well, I mean, as you said,
the beauty of being here in Siena, just up that hill, is one of the oldest banks in the
world. STEVE DIGGLE: I think it’s the world’s oldest
continuously operating bank, established in 1472. GRANT WILLIAMS: So it feels rude for us to
talk about Italian banks without– can we go and take a look at Monte dei Paschi? So maybe we’ll just get the check, finish
our coffees, and go and take a look up there. What do you reckon? STEVE DIGGLE: Good. GRANT WILLIAMS: Alright. The fate of Italy’s banking system, for better
or worse, seems inexorably tied to its place at the heart of the European Union. The fragility of Italy’s banks mirrors that
of the country as a whole, and their reliance upon state aid and low interest rates have
placed them in increasingly perilous situation. STEVE DIGGLE: Here we are– Monte Paschi. Monte dei Paschi– world’s oldest continuously
operating bank and pretty nice building. GRANT WILLIAMS: Beautiful. STEVE DIGGLE: Here’s a guy who’s just seen
the balance sheet of the current Monte Paschi. He’s not looking very happy about this. GRANT WILLIAMS: It’s just reason. STEVE DIGGLE: So formed in 1472– Monte dei
Paschi– Mound of Piety. So it was formed as a charitable organization
whose profits all went to charity in the local area, and that’s carried on even to this day. 1472– continuously operated. GRANT WILLIAMS: Yeah. So six– almost six centuries. STEVE DIGGLE: Almost six centuries. 400– no. 572 years as a private enterprise continuously
operated– went public in 1999. Since then, in the last 18 years, it’s had
three government bailouts. GRANT WILLIAMS: It’s extraordinary, isn’t
it? I mean, it’s truly extraordinary. And it speaks volumes about what we spoke
about– incentives, responsibilities– right here. I mean, it’s writ large. STEVE DIGGLE: After they IPO’d in 1999, they
trebled the balance sheet in seven years. Stock hit an all time high of current money–
because it’s been recapitalized several times now– EUR 9,300 in the summer of ’07– GRANT
WILLIAMS: Perfect. STEVE DIGGLE: –current price around EUR 1.6–
so you really want to meet the guy who paid 9,300. GRANT WILLIAMS: Right. STEVE DIGGLE: –and find out what his strategy
is for breaking even. GRANT WILLIAMS: Well, yeah. I average down, obviously. GRANT WILLIAMS: You’re in at 4 and 1/2 grand,
and things are looking better. STEVE DIGGLE: It may be a lesson to people
on averaging down. No. So what happened here? They trebled the balance sheet. And then when ’08 came, and everything got
really bad really quickly, ultimately, 45% of their entire debt base was considered to
be non-performing. GRANT WILLIAMS: 45%– I mean, how do you find
that many bad credits? STEVE DIGGLE: And a third of it is still essentially
non-performing. So a third of the $150 billion that they created–
or $100 billion they created anew. When you actually look into what happened,
I mean, this is obviously the worst. But UniCredit was 207 euros in the summer
of ’07– 11 right now. So it wasn’t that Monte Paschi was unusual,
right? Keynes’s famous rule, right? If you’re a banker, the one thing you must
never do is fail idiosyncratically. Right? GRANT WILLIAMS: Right. STEVE DIGGLE: Always fail together. And they all did the same thing. It’s just, these guys did it more and more
aggressively and from a smaller capital base. And they were trying to catch up. GRANT WILLIAMS: But that mindset change from
a 500-year-old institution– how does that happen so fast? Because new guys come in– OK. We’ve got a great idea because we need to
grow– how about we list– It’ll be great. We get access to more capital. I mean, it’s– STEVE DIGGLE: And we’ll be
able to create an incentive to attract real talent, because then we’ll have a currency. So then we’ll be able to offer incentives. We’ll be able to offer bonuses. And what did the bank want to do? Wanted to expand its balance sheet. So what were the managers being incentivized
to do? Expand the balance sheet– not make a profit–
not make a– GRANT WILLIAMS: Lend more money. STEVE DIGGLE: –but make a solid, long-term
financial organization expand the balance sheet. That’s what we’re going to incentivize you
to do. And you’ve got to say, they did it. 300% increase. GRANT WILLIAMS: Well, they did, but– STEVE
DIGGLE: –in seven years. That’s pretty good. GRANT WILLIAMS: Everybody watching it uses
that as their metric to evaluate. The whole thing is so circuitous, that we’re
going to expand the balance sheet. We’re going to lend more money. And the people watching it go, they’re lending
more money. This is great for the business. The business is growing. It’s– I mean, it’s ludicrous– STEVE DIGGLE:
Why would you ever value a business on revenues? Why would you ever value a business on revenues? I can sell you $1 at 99 cents all day. My revenues are going to look spectacular. GRANT WILLIAMS: Sure. STEVE DIGGLE: I have no idea. Why would anyone want a business with lots
of revenues? You actually want, just, a business that makes
a profit. Now, banking does make a profit. Look at this. They built this with profits. GRANT WILLIAMS: From a bench over there–
STEVE DIGGLE: From a bench– GRANT WILLIAMS: –to this. STEVE DIGGLE: It’s a profitable business,
if you do it right. But if you do it badly, you can run out of
money extremely quickly. GRANT WILLIAMS: And go out of business. But that’s the whole point, right? It’s a really simple business to grow steadily. If you want to start growing exponentially,
the only way to do it is to take unnecessary risks. Right? That’s the way. STEVE DIGGLE: So why is the Italian banking
situation so much worse than most other places? It wasn’t that they did anything extraordinary. Monte Paschi had a specific derivatives catastrophe,
and the lending was reckless. But all the other banks are somewhat similar. I mean, they’re obviously better– GRANT WILLIAMS:
In all the other countries, this is a common or garden banking problem. STEVE DIGGLE: It’s 68% owned by the government,
by the way, now. So the IPO has been 2/3 reversed anyway. GRANT WILLIAMS: Sure. STEVE DIGGLE: It used to be owned by a mound
of piety. Now– It’s 68% owned by the Italian taxpayer,
who’s really underwater as well. So what went wrong here is just another chapter
in the story, which is– this is what banks do when credit conditions are eased and they’re
under an incentive to expand their balance sheet. It’s not really fundamentally different to
what happened in America. GRANT WILLIAMS: No. STEVE DIGGLE: But there is one major difference,
which is that, since 2008 the American economy has expanded. It’s now significantly bigger than it was
in 2008. That means, even those bad debts, eventually,
they get dissolved. Right? I mean, eventually, economic growth solves
all your problems. You haven’t had economic growth in Italy for
10 years. You’ve got 55 million people– most of them
employed– most of them doing a good job. And you’ve seen zero economic growth. And that’s what makes the Italian problem
so serious, because without growth, you can’t grow your way out of your problems. And you’re stuck. You’re not lending. Well, we know they’re not lending because
we have this huge credit problem in Italy in 2013, 2014, where no one could get credit. We haven’t been able to get credit on anything
we’ve tried to do here. So credit’s effectively dried up. So what’s your plan? Your plan is to work out of your way out your
bad debts? Well, guess what? For that, you need rising asset prices for
that. You need– GRANT WILLIAMS: Correct. STEVE DIGGLE: –economic growth. So it’s a huge problem. And it’s not getting any better. In fact, you can see the fact that the share
prices have all collapsed. I mean, there was a reasonable banks in them. Monte Paschi got back to, like, 1,100 in the
summer of 2014. GRANT WILLIAMS: One last chance to lose all
your money, if you’re a trader. STEVE DIGGLE: You’re only down 90% at that
point. GRANT WILLIAMS: Yeah. Right. Exactly. But this is the thing– all these bounces. If you look at the underlying business, no
one’s buying this stuff because the business is getting it. They’re buying it because it’s gone from 9,000
to whatever. There’s a bounce here. And so these things just become trading vehicles. You’ve got all the debt– the sovereign debt
of Italy is now littered across the balance sheets across Europe– the banks here– the
banks of France. There’s 9 billion Italian sovereign debt on
French balance sheets. German banks are stuffed to the gills with
this stuff. It just keeps going around, and around, and
around. STEVE DIGGLE: Well, France and Spain together
have pretty much the same level of bad bank non-performing loans as Italy, but Italy is
concentrated. It’s larger. And there’s no economic growth. So that really ties the current banks into
the political crisis. GRANT WILLIAMS: Right. Of course. STEVE DIGGLE: Because the Italian government
owes the world EUR $2.4 trillion. The bans have lent about a similar amount,
and at least 10%– probably more like 12%, 13% of it– is bad. That means they need the EU to continue to
support them. So that makes things a bit more difficult. But one thing that I keep coming back to is,
why isn’t the Italian economy growing? Look around. Right? It’s the fifth most visited country in the
world for a reason. It’s beautiful. It’s fecund. It exports things all around the world. They make things that people want, unlike
Greece. I mean, they make furniture. They make clothes. They design beautiful buildings. GRANT WILLIAMS: Cars. STEVE DIGGLE: Make good cars, right? So what the hell is going on? Why aren’t they growing? And yes, consistently, the message from Italian
politics is, we’ve got to blame Brussels. And I say, yeah. OK. I see that. And I have a lot of sympathy for it. But look at the situation in Italy that stops
the economy growing. What is it? It’s not the people. It’s not the geography. It’s not the talent. What is stopping this place growing is the
suffocating bureaucracy. And have a look at yourself, right? As one Italian says to another in one of Shakespeare’s
plays, “It is not the fault, dear Brutus, lies not in our stars, but in– GRANT WILLIAMS
AND STEVE DIGGLE: –ourselves– STEVE DIGGLE: –that we are underlings.” This country is 75th in the World League of
ease of starting a business. GRANT WILLIAMS: Right. STEVE DIGGLE: It’s below the Democratic Republic
of Congo. That’s not Brussels. GRANT WILLIAMS: No. STEVE DIGGLE: That’s Italy. GRANT WILLIAMS: That’s true. STEVE DIGGLE: It ranks 111th in getting credit–
well, partly, thanks to these guys having no more money. GRANT WILLIAMS: It’s just remarkable, right? Exactly. STEVE DIGGLE: It ranks 112th in paying taxes. 112th. It’s a G7 country. It ranks 112th. It’s behind another 111 countries. There’s only 175 in the entire index. GRANT WILLIAMS: Right. STEVE DIGGLE: It’s not just about Brussels. It’s about this system that you’ve created
that suffocates entrepreneurial flair– and deters people from coming here, and starting
businesses, and growing businesses. And these guys are a classic example of that
because you’ve got to have a functioning banking system. So for a window of about four years, these
guys– Boba Monte, as they’re known, Father Monte–. Anyone could just rock up with a stupid business
plan and walk away on a check, right? Particularly if they were local. And then all of a sudden, that doesn’t work
out. And now you can’t have a penny, even if you’ve
got a great business plan. It’s a terrible way of running things. And then, probably most depressing of all,
it continues to rank really badly on this global perception of corruption– about 54th,
I think. GRANT WILLIAMS: Right. STEVE DIGGLE: –just behind Namibia. GRANT WILLIAMS: Right. STEVE DIGGLE: –one ahead of Saudi Arabia–
G7 country. GRANT WILLIAMS: So in terms of coming out
of this– the one thing you can rely on is that, at some point, credit will be extended
willy-nilly again. We have to get through the phase where they
shut the doors and go right, we can’t extend credit to anybody. So if there is some hope, it’s that we all
get crazy again, at some point, when the all-clear is sounded. STEVE DIGGLE: Yeah. I mean, that’s fine. Right? I mean, to a certain extent, that will alleviate
some of the symptoms. But the underlying cause remains that in a
country that ought to be one of the most prosperous in Europe, a system that is weighing this
place down and stopping it growing continues to be in place– and is hardly being challenged. I mean, Macron, to a degree, in France, is
talking about some of these issues. We need to work harder. We need to remove impediments to incentives. We need to find a way of encouraging growth. That debate’s not happening in Italy. Right? I mean, the 5Star Movement are talking about
massive subsidies for everyone. We’ve suffered enough. Let’s open the spigot. The League, actually, for all of their populism–
somewhat crazy nonsense and sometimes racism– do have a strong platform of support for small
businesses. At least fair enough for that. But really, the debate is all about immigrants. It’s all about bad Brussels– throwing off
the shackles of these people who’ve oppressed us. Well, you know who’s really oppressing you? This ridiculously oppressive system of red
tape, regulation, rules, inflexible, local bureaucrats, too much regulation, too much
corruption– everything’s hard– hard getting a permit, hard paying your taxes, hard establishing
anything. And so on, and so on, and so on. And these guys just represent a monumental
failure to support business. That’s what banks are supposed to do– to
equity and debt. Debt can be syndicated through a bond market
or it can come from banks. It’s not hard. GRANT WILLIAMS: No. It’s not. STEVE DIGGLE: It’s not hard. GRANT WILLIAMS: And when I look at this, that’s
the thing that I find so disappointing in the whole thing– because it’s the same mistake
that gets made over, and over, and over again. This is nothing new under the sun. It’s a common or garden banking crisis. Well, I mean, what an awful thing to be in
existence. STEVE DIGGLE: Well, if you really want a lesson
on why a stock that is falling a lot is not cheap, this is the one. GRANT WILLIAMS: Yeah. Exactly right. STEVE DIGGLE: Right? Stock down 90% can still fall another 99%
if it has a bad business– even if it’s a big business. GRANT WILLIAMS: The catastrophic destruction
of a 500-year-old banking institution through misaligned incentives, aided by access to
artificially cheap capital, is emblematic of all that ails not just Italy, but the world
in 2019. And the interconnectedness of Europe’s bank
and government debt ties them all together in the worst way imaginable. But it’s not all the fault of Brussels bureaucrats. When you see Monte dei Paschi, it kind of
crystallizes what an absurd situation the whole thing is. I mean, this institution’s been around for
centuries. STEVE DIGGLE: 6 and 1/2, right? I mean, you’d think they would have managed
to have spotted a few pitfalls in the road over 6 and 1/2– GRANT WILLIAMS: Well, and
they probably did. What they didn’t spot what a currency union,
and the pressures that all this massive securitization, and that chase for profits– that hunger for
just turning another dollar instead of being bankers. I mean, it’s criminal, frankly. It’s a shame. Really is. STEVE DIGGLE: Well, whether it’s criminal
or not, I guess, needs to be made to be seen. But it’s a testament to how fragile things
become when everyone chases the next quarter. GRANT WILLIAMS: Exactly. Exactly. STEVE DIGGLE: And I think this is something
that you and Tony Deden covered. GRANT WILLIAMS: Yeah. We did. STEVE DIGGLE: –in quite a lot of detail. And I think, for a lot of people, that was
an interesting perspective on things because, clearly, a lot of investors spend an awful
lot of time looking for the next quarterly results. Early traders live and die by those things. But ultimately, what happens over the next
90 days doesn’t really matter. And I think one of the history teaches you
is that, if you want to survive long-term, you need to be looking further down the road
than the next 90 days. And you need to be planning for further than
the next 90 days. And there’s a lot of criticism of short-term-ism
in banking, in finance, and the way companies are run. But this comes back to the whole nature of–
capitalism rests on the proposition that people respond to incentives. And if you have company executives that are
being incentivized or banking executives that are being incentivized to make money every
90 days or every 180 days, they’re going to do that. GRANT WILLIAMS: Of course. Yeah of course. STEVE DIGGLE: They’re going to do that. There’s probably no greater example in American
banking history than the transformation of Goldman Sachs from the private partnership
to a limited company. GRANT WILLIAMS: And then on to a listed company–
STEVE DIGGLE: A listed company. GRANT WILLIAMS: –and into a bank holding
company, right? STEVE DIGGLE: Well, yes. But a listed company– and quite a lot of
people were like, when did Goldman Sachs change from this organization of bankers who were
looking after an organization that had lasted a long time and planning for the next generation,
to be one that was just looking forward to the next earnings date? And the answer is– the IPO– Fundamental
change in the way the organization ran itself and behaved. And it’s just the same here. I mean, you’ve got Italian executives– but
all people under tremendous short-term pressure to produce constantly good results. And of course, it’s nonsense– businesses,
economies, life is cyclical. You’re going to have downturns. You can’t just turf everyone out because you’ve
just had a weak quarter. But it’s the way people respond. And to a certain extent, I’ve got some sympathy
for the executives because, having run a hedge fund– which I was trying to run for a cycle,
because we were long volatility, and you don’t always get volatility. But eventually you do. And you’re under tremendous pressure to make
money every month. I’m like, it’s really hard to run a fund for
an economic cycle when investors are tapping you on the shoulder to make money for every
30 days. GRANT WILLIAMS: Well, I mean, that’s just
gotten worse. And this year, this thing about listing is,
obviously, everyone that is, then, involved in running the company, sadly, can check and
does check their net worth– GRANT WILLIAMS AND STEVE DIGGLE: –every five minutes. GRANT WILLIAMS: And so you can’t help but
take your eye off the ball because, suddenly, you have a bad day. You can crystallize that and go, oh my god. This cost me x today. And it freaks people out. I mean, it’s backwards–. STEVE DIGGLE: So what does that mean? Listing’s a bad idea? GRANT WILLIAMS: No. I’m not saying listing’s a bad idea. But I think if your remuneration is so tightly
tied up to the share price, I understand– STEVE DIGGLE: So it’s an alignment. GRANT WILLIAMS: It’s poor incentive. STEVE DIGGLE: It’s an alignment. It’s poor incentives. GRANT WILLIAMS: It’s always an alignment. You said this to me so many times when we
worked together. You have to get the incentives right. If you get the incentives right, the results
will go the way you want. If you get the alignment– the incentives–
wrong, you’re going to get bad results. I mean, it’s been proven time and time again. STEVE DIGGLE: What do you think of this idea
that you shouldn’t get a vote in a company until you’ve held the shares for a certain
period of time? You can’t just turn up two minutes before
the vote and– GRANT WILLIAMS: I think it’s a great idea, frankly. I really do. I mean, I understand– so if you got a share,
you deserve a vote. But if we want to try and create stability–
and even though there’s an illusion right now that we don’t need to, because everything’s
fine– we do. I mean, this is a very fragile economic system. That’s a great way to go about it. STEVE DIGGLE: So what would the curing period
be? 30 days? 90 days? 180 days? GRANT WILLIAMS: For me, I would rather it
be longer– STEVE DIGGLE: Really? GRANT WILLIAMS: –than shorter. Yeah. I do, because I think if what you really want
people voting who have a long-term interest in the company– not who are trying to make
a change to effect some kind of short-term outcome– that’s dangerous to me. STEVE DIGGLE: Isn’t that somewhat going to
change the way stock markets work? GRANT WILLIAMS: But how do they work right
now? I mean, do they work right now? I would argue that perhaps they don’t because
the idea of price discovery, and the idea of markets reacting to news the way they’ve
always reacted to news, is completely gone. They just don’t do that any more. STEVE DIGGLE: Well, I mean, between the algos,
and the computers, and the ETFs, you’ve got a big chunk of company ownership being held
by computers who don’t have a view– and ETFs, who are essentially passive. GRANT WILLIAMS: Exactly right. And for me, seeing Monte dei Paschi– seeing
this 5-centuryold– STEVE DIGGLE: 6 and 1/2. GRANT WILLIAMS: 6-and-1/2-century-old institution
that has been brought to its knees by this change and this renewed focus on short-term
profits– it speaks so loud to me. It’s almost deafening. STEVE DIGGLE: Yeah. GRANT WILLIAMS: Before we headed back to Steve’s
to discuss the investment implications of what we’ve seen, we had one more stop to make–
the wall town of Cortona, where we would discuss, perhaps, the thorniest issue facing Italy–
immigration. STEVE DIGGLE: Italians are looking for a European
solution. But when it comes to allowing immigrants in,
everyone gets very nationalistic. I think your point is exactly right, which
is that, back in the status quo– and that Europe always winning and everything holding
together has been a reasonably good trade– Brexit excepted. I think that level of complacency is very

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