The next banking crisis is just around the corner.
This time, however, its origin will not be the United States. Instead, the trouble will start across the pond in Italy.
Since the 2008 financial crisis pummeled international finances, Italy’s banks simply haven’t recovered. In fact, the Italian banking system is saddled with perhaps as much as €360 billion in bad loans – the equivalent of a fifth of the country’s GDP.
It is also roughly 17% of the total bank loans. For comparison, during the 2008-09 financial crisis, the level of sour loans was only five percent in U.S. banks.
Italy needs a giant-sized TARP-style bailout, similar to the one the U.S. was granted during the last crisis.
Europe’s Own Goal
But guess what? EU bureaucrats and politicians are blocking such a move as being against their “rules.” With restrictions like this, is it any wonder that the UK voted to leave the EU?
Just like in soccer – Europe’s favorite sport – the EU seems intent on scoring an “own goal,” in which a player accidentally puts the ball into his own team’s net.
Italy’s Prime Minister Matteo Renzi stands ready to inject funds into Italy’s banking system, in order to recapitalize its banks.
But for the fourth time since November, EU regulators have rejected this attempt at redemption. Renzi was even directly rebuffed by German chancellor, Angela Merkel, who said, “We wrote the rules for the credit system, we cannot change them every two years.”
These “rules” include bail-ins. In other words, people with money in these banks will lose part of their savings.
In addition, small Italian investors have €187 billion in bank bonds – which were sold as being 100% secure – that will be wiped out. Last year, over 100,000 holders of such bonds in four small Italian banks were completely erased.
The attitude from the EU bureaucracy is rather dismissive – a sort of a “let-them-eat-cake” insulting tone. I suspect Merkel will change her tune when German banks reach these same stress points.
To his credit, Renzi is threatening to tell the EU to take a hike and proceed without it, to inject €40 billion into the banks. Renzi is willing to do so, even though Italy has the second-highest debt level in Europe, after Greece.
It is crucial that Renzi stabilize the debt or he will no longer have a banking system, at all.
An index of Italian banking stocks this year, is already down by half. That index is down by a third in just the past two weeks!
That €40 billion figure still won’t be enough with roughly €200 billion in bad loans stacked against Italy’s economy, €85 billion of which have yet to be formally recognized. The €5 billion privately-funded Atlas-bank bailout fund is already nearly out of money after only a few months of operation.
Needless to say, Italy needs a solution – and soon.
The Risk of Contagion
Italian banks are important, even though the only bank deemed systemically invaluable is UniCredit S.p.A. (UNCFF).
While the urgency of the matter is recognized by people in the European banking sector, it has been largely ignored and downplayed by the bureaucrats.
Initially, the banks turned to – and maybe even trusted – the authorities for some help, where there clearly hasn’t been any.
A senior Italian banker told the Financial Times, “You think you are kicking the can down the road, but suddenly the road turns uphill and the can comes back and hits you in the face.”
The chairman of French banking giant Société Générale (SCGLY), Lorenzo Bini Smaghi, told Bloomberg Italy that this banking crisis could spread to the rest of Europe. He urged that the rules limiting state aid to lenders, be reconsidered to prevent greater upheaval in the region.
In addition to Italy, Smaghi explained that Germany also had too many banks that are not producing any profit, putting the German economy in danger. Despite her refusal to adapt regulations in order to help Italy, its time for Chancellor Merkel to face the music: her country could be next in line for major trouble.
This whole situation will get even more interesting (read: disconcerting) at the end of July, when the results of the stress tests on Italian banks are announced. The best guess is that at least €120 billion of additional capital will be needed.
But will the EU bureaucrats and politicians finally bend? Or will Italy have to go the route of the U.K. and see an exit from the superstate in order to save itself?
Only time will tell.