Is Rome The Next Detroit?

The “Eternal City” of Rome may soon find itself being considered alongside Detroit as bankruptcy approaches and institutional bond buyers grow weary.

Is Rome The Next Detroit?

Bailout from national government uncertain

The city of seven hills needs to close a $1.7 billion (US) budget gap and likely won’t get much help from the national government, as Italian lawmakers from across the struggling nation, whose cities are equally having difficulty making ends meet, say a bailout decree for the city has little likelihood of passing the national assembly.

“It’s time to stop the accounting tricks and declare Rome’s default,” Guido Guidesi, a parliamentarian from the Northern League, said in a Wall Street Journal article.  However, some opportunity may exist with a new Italian prime minister, who has indicated a willingness to accommodate Rome to a degree, forestalling difficult choices.

Difficult choices: sell assets, raise taxes, cut services

Rome is faced with difficult choices as municipal bond buyers have grown weary of promises to balance the budget and make tough choices to repay the debt.  In a market environment where government debt payments are viewed as increasingly unstable – a notion unthinkable just a few years ago – politicians face difficult choices as loan options dry up.  Political leaders could engage in short term solutions, such as selling assets such as utilities or, in the case of Chicago, selling the rights to parking on city streets. But such short term solutions only delay the inevitable reckoning where politicians will be forced to raise taxes, delay or suspend payments to suppliers or cut badly needed city services and worker pensions to balance the budget.

Rome’s mayor, avoiding difficult choices, looks to national government for bailout

Ignazio Marino, a U.S.-trained transplant surgeon who now serves as Rome’s mayor, was elected on a platform of promises to improve basic services, eliminate nepotism, and improve tourism.  Instead, he has focused on a budget battle, indicating he will not propose deep spending cuts.

A default in the capital of Italy could have much wider ramifications on the Mediterranean nation, which has struggled to keep its own sovereign debt offerings together amidst concerns of default and rising rates to compensate investors for greater risk.  “A default of Italy’s capital city would trigger a chain reaction that could sweep across the national economy,” Mirko Coratti, head of Rome’s city council was quoted as saying in the report.

Despite recent legislative setbacks, Mayor Marino appears to be pinning his hopes on a national government bailout that would only extend to Rome.  “Rome is unique compared with other cities” and deserves state support because of huge numbers of visitors who use services but don’t contribute much to the economy, Mr. Marino said in a recent Wall Street Journal interview.

Problem collecting revenue

The report notes Rome has a long history of difficulty balancing its books.  Due to “its dearth of industry,”  Rome depends heavily on trash-collection levies and the sale of bus and subway tickets, yet it struggles to collect either.  Twenty five percent of those riding Rome’s public transit system don’t buy tickets.  Compare this to just 2% of passengers on London’s public transit network. Further, employee absenteeism at Rome’s public-transit and trash-collection agencies runs as high 19%, far above the national average, according to the report.



About the Author

Mark Melin
Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com