Italy’s Banking Crisis Spirals Elegantly out of Control, by Wolf Richter

The ECB is accepting as collateral for loans impaired debt that is so junky that the only institution dumb enough to guarantee it is…the ECB! This convoluted story is hard to believe, but apparently it’s happening. From Wolf Richter at wolfstreet.com:

How to dump toxic waste on the public through the backdoor.

Back during the euro debt crisis, while the ECB was buying government debt from Member States to keep Italian and Spanish government debt from imploding, German politicians fretted out loud about what exactly the ECB was buying. Among them was Frank Schäffler, at the time Member of the Federal Parliament, who in September 2011 said with uncanny accuracy:

“If the ECB continues like this, it will soon buy old bicycles and pay for them with new paper money.”

This is now coming to pass.

Italy, the Eurozone’s third largest economy, is in a full-blown banking crisis. Four small banks were rescued late last year. The big ones are teetering. Their stocks have crashed. They’re saddled with non-performing loans (defined as in default or approaching default). We’re not sure that the full extent of these NPLs is even known.

The number officially tossed around is €201 billion. But even the ECB seems to doubt that number. Its new bank regulator, the Single Supervisory Mechanism, is now seeking additional information about NPLs to get a handle on them.

Other numbers tossed around are over €300 billion, or 18% of total loans outstanding.

The IMF shed an even harsher light on this fiasco. It reported last year that over 80% of the NPLs are corporate loans. Of them, 30% were non-performing, with large regional differences, ranging from 17% in some of the northern regions to over 50% in some of the southern regions. The report:

High corporate NPLs reflect both weak profitability in a severe recession as well the heavy indebtedness of many Italian firms, especially SMEs, which are among the highest in the Euro Area. This picture is consistent with corporate survey data which shows nearly 30% of corporate debt is owed by firms whose earnings (before interest and taxes) are insufficient to cover their interest payments.

The reason these NPLs piled up over the years is because banks have been slow to, or have refused to, write them off or sell them to third parties at market rates. Recognizing the losses would have eaten up the banks’ scarce capital. Reality would have been too ugly to behold.
The study found that the average time for writing off bad loans has jumped to over six years by 2014. And this:

In 2013, on average less than 10% of bad debt, despite already being in a state of insolvency, was written off or sold. The bad debt write-off rate varies significantly across the major banks, with banks with the highest NPL ratios featuring the lowest write-off rates. The slow pace of write-offs is an important factor in the rapid buildup of NPLs.

Now, to keep the banks from toppling, the ECB has an ingenious plan: it’s going to buy these toxic assets or accept them as collateral in return for cash.

To continue reading: Italy’s Banking Crisis Spirals Elegantly out of Control