Italy’s banks may be the straw that breaks markets’ backs. Or the Europeans may do what they do best: kick the can and save face. From Don Quijones at wolfstreet.com:
There’s a pervasive sense of inevitability to Italy’s banking crisis.
Without a taxpayer-funded bailout that directly contravenes the Eurozone’s new bail-in rules, the world’s oldest surviving bank, Monte Dei Paschi, could soon be out of business. Shares of the decrepit financial entity have long been reduced to a penny stock. So far this year, they’ve lost 78% to close on Tuesday at an inconsequential €0.28.
The closer it comes to its end, the louder the calls for its rescue. Last week saw two out of three of the members of the institutional triad formerly known as the Troika — the ECB and the IMF — lend their support to a taxpayer funded bailout of Italy’s banking system. So, too, did the biggest U.S. bank by assets, JP Morgan Chase.
All that was needed was for Europe’s most influential bank, New York-based Goldman Sachs, to give its blessing. That came on Monday in a report whose conclusion is fittingly Goldman-esque: saving Italy’s banks is not just necessary; it would be a bargain for all concerned. The authors breezily point out that the €210 billion euros of non-performing loans (ha, the ECB says €360 billion and growing every time someone looks at it) on the books of the banks could all be wiped out with the equivalent of just nine months of ECB President (and former Goldmanite) Mario Draghi’s bond purchases.
Here’s the FT:
With the ECB hoovering up €120bn per year of outstanding Italian government bonds as part of its quantitative easing scheme, “by the time QE is over – not sooner than end 2017, on our baseline scenario – around a fifth of Italy’s public debt will be sitting on the Bank of Italy’s balance sheet”, writes Francesco Garzarelli at Goldman…
Bringing the entire net stock of bad loans onto the government’s balance sheet would be equivalent to 9-months worth of BTP [Italian government bond] purchases by the ECB…
With four days for authorities to come up with a plan to inject capital into Monte dei Paschi, Goldman adds that some form of “state intervention is both “likely and, at this late stage, desirable”.
Desirable for whom?
According to Goldman, Italy as a united whole – from the poorest to the richest, the oldest to the youngest – all will benefit from wiping the bank’s — or banks’ — slate clean. An added bonus, the report contends, is that Italy’s troubles are largely contained to its domestic economy. “Italians have lent mostly to themselves: the country’s net international investment position is comparatively small,” the report says.
This is a disingenuous falsehood that has been peddled across multiple media for weeks now. The contagion risk of Italian banks and their bonds is significant, particularly for banks in France and Germany, but also in Spain, the UK, and the US.
However “cheap” the eventual bailout may be — and one can be sure it will be considerably more expensive than the original estimates — it will do little to remedy Italy’s chronic financial ills, which include a stagnant economy, a public debt that exceeds 130% of GDP, a currency that is too strong, a zombified housing market, 35% youth unemployment, and entrenched political corruption. As The Guardian‘s Larry Elliot writes, Italy’s non-performing loans reflect a “non-performing economy.” They are “the symptom of the problem, not its cause.”
To continue reading: Contagion from Italy’s Bank Meltdown Spreads
