From the “Well That’s not good” department…
Why Italy’s banking crisis will shake the eurozone to its core
By Tim Wallace and Szu Ping Chan
16 July 2016 • 4:41pm
They call them le sofferenze – the suffering.
But despite the emotional name, these are not people. They are loans. Bad debts, draining banks of profits and undermining economic growth.
The name is less clinical than the English term “non-performing loans”, a reflection of the Italian authorities’ emotional rather than business-like approach to the problem.
None the less, the loans are indeed causing real suffering. The €360bn (£300bn) of sofferenze from Italian banks show borrowers are weighed down with debts they cannot afford, while the banks are struggling to offer new credit to the households and firms that need them.
In a way, Italy’s authorities had good intentions. When loans turn bad and banks lose money, someone has to pay. It should be the banks’ investors, the shareholders and bondholders who take the risk of investing in return for the chance of profits. Unfortunately in Italy, households are keen investors in bank bonds, and would be badly burnt if they had to face up to those losses.
So nothing was done. The bondholders have so far kept sight of their savings, and the banks have been allowed to ignore their bad loans. It saved the country some short-term pain, but the financial problems never went away.
Essentially they just ignored the whole problem, and it’s gotten worse. I hope the graphs in the article are somehow wrong… but fear they are accurate. They show non-performing loans headed toward 20%. That’s just a crazy level of bad debt.
Given the high ownership of bank bonds by the citizens, and the political fragility of the Italian Government, they have one heck of a problem. Stick it to the bond holders, bank confidence plunges along with the ability of a lot of those folks to pay back loans. 1/2 stick it to them via conversion to stock / shares (a “bail in”) and you give them something, but still are screwing them. Do nothing, the ECB et.al. come after you (and eventually it all collapses anyway). Use taxpayer money to bail out the banks, the government likely falls.
What a sack of poo…
Now they have spread to the wider economy, and are morphing into a political crisis with implications across the EU. It could bring down Italy’s government.
If no compromise is reached between Rome, which wants to protect bondholders, and the EU, which wants to enforce the rules, it could even bring down the eurozone.
“This could be a bigger risk than Brexit,” says a lawyer who is close to the situation.
“The Greeks are desperate to be anchored into Europe, they are willing to suffer and suffer and suffer to stay in – I am not sure that Italy is willing to suffer.” The stakes are that high, and nobody knows whether the EU can muddle through another crisis, or if shock waves from Italy will split the union. Long nights and fraught nerves lie ahead.
This is just the latest phase of the eurozone’s seemingly never-ending crisis, and the International Monetary Fund’s latest assessment of the currency area’s third-largest economy shows why Italy is the latest focal point.
The country faces a slow crawl back to economic health, the IMF warned last week. Productivity growth remains weak, debt is still climbing and the economy can’t prosper while its banking sector is sick.
Under current projections, the economy will not get back to its pre-crisis size until 2025. In other words, Italy faces not one, but two lost decades.
The first impact would be on the banks. They rely heavily on retail deposits and bonds to finance their lending – according to Bank of America Merrill Lynch, households own €235.6bn of bank bonds, amounting to 14.6pc of their wealth – and the banks do not want to frighten them.
“The risk of bailing in retail bondholders is that the domestic bond market, which is important for funding Italian banks, could potentially shut down,” says Roberto Henriques at JP Morgan.
“At the margin, the media coverage of any subsequent losses for retail bondholders might also undermine retail depositor confidence in the same institutions, with the potential for some deposit outflows.”
In this case, the financial crisis could worsen, rather than being resolved.
It goes on from there further admiring the problems and the linkages in Italy and the broader EU.
For me, it looks like the whole EU is in big trouble. Britain is headed for the exit (and likely just in time). Italy, the “3rd largest economy”, has debt:GDP ratio about 135% (i.e. bad..) and private debt that’s garbage on top of it, with banks with no net capital and stagnant growth.
Figure Greece is bankrupt too, and Spain with no jobs and poor prospects.
Essentially that leaves France and Germany to carry the freight… and Germany is being overrun with millions of “refugees” looking for handouts.
No wonder all the money is flowing into US Stocks and bonds… and propping up our markets far beyond any reason. (S&P PE ratio is crazy high compared to historical norms, but with bonds at 1+% one of the few games left to play that has any yield potential).
IF the ECB (European Central Bank) and IMF try to do another Cypress or Greece on Italy, I think the EU dissolves. If they don’t, the EU becomes toothless and Italy flounders for a few more decades.
What a mess.