Italy’s banking system is buried under tons of nonperforming loans and is insolvent. It’s no different than a lot of banking systems, just out in front. From Don Quijones at wolfstreet.com:
Risk of contagion in Italy and far beyond would be huge.
Just how low can Italian bank shares go? That’s the question plaguing the minds of European investors, policy makers, bankers and central bankers. Today the shares of the country’s third largest publicly traded bank, Monte Dei Paschi, plunged 14% to €0.33, their lowest point ever. Two years ago, they ran between €5 and €9.
The reason for the latest plunge was news that the ECB had sent the bank a letter urging it to draw up a plan for tackling its bad-loan burden. The lender is being asked to reduce its load of curdled debt by €10 billion to €14.6 billion by 2018. That’s a big ask even in the best of times, and these are certainly not the best of times for Monte Dei Paschi. According to Bloomberg, its loan loss provisions would represent over 95% of its operating profits.
No bank in Europe has fallen so low, so fast, without completely crashing and burning. On the eve of the global financial crisis, Monte Dei Paschi was worth €15 billion. Now its market cap is just over €1 billion. The only reason it’s still alive today are the multiple taxpayer-funded bailouts it has received, and all they seem to have achieved is to postpone the inevitable (and prolong the taxpayers’ suffering).
Earlier this year, Italy’s government was given the go-ahead to set up a bad bank in which to bury some of Italy’s most toxic financial waste. It was a €5 billion solution to a €360 billion problem, as we warned at the time – far too little, far too late. Last week the EU, in a fit of desperation, authorized the country to use “government guarantees” to create a “precautionary liquidity support program for their banks.” But given that the guarantees are not supposed to be used and do nothing to address the bank’s biggest problem — gaping capital holes — the stunt was pure political theater.
Lo and behold, just four days later, investor fears are once again spiking. This time around, however, Italy won’t be allowed to use taxpayer funds to bail out the bank, thanks to Europe’s new rules that require that stockholders and some bondholders get bailed in first.
“We wrote the rules for the credit system, we cannot change them every two years,” Angela Merkel said last week.
Whether Merkel holds firm to her commitment is a matter of debate. Given that the rest of Italy’s big banks, including its one and only global systemically important financial institution, Unicredit, are in similar straits to Monte Dei Paschi and Italy’s government boasts the third biggest public debt pile in the world (after the U.S. and Japan), there is a very real risk that the country could end up suffering a bank run, if not an outright banking collapse.
To continue reading: Investor Fears Spike as Italy (and the EU) Inch Closer to Doomsday Scenario
