Italian Banks – “Bigger Risk Than Brexit”

London’s ‘The Telegraph’ ran a story over the weekend titled “Why Italy’s banking crisis will shake the Eurozone to its core”.  Before we summarise this for you it again strikes us as stupefying that our mainstream news sees it as more relevant for someone in Brisbane to know of a house fire in Melbourne than to report on more of these globally significant situations.  Mark our words, anything that shakes the Eurozone to its financial core will have a very big impact on Australia.  We remind you Australia now has over $1 trillion in foreign debt, much of that to us as individuals not Government debt.  Now, unlike any time before, we are inextricably linked to this global financial Ponzi scheme.  Anyway, getting off the soap box…

We have written a bit lately on the Euro banking situation (here and here) and Deutsche Bank has taken a lot of the focus but this article outlines just how dire the Italian banking situation is.  

The main issue with the Italian banks is the sheer scale of their non-performing loans (NPL’s or ‘bad loans’).  So great is the $525 billion or 18% NPL burden on Italian banks that they are struggling to offer new loans to households and businesses that need them.  To put that 18% into perspective, Spain is around 7%.  In 2015 the world average was 4.3% and Australia was 1%.  You may recall our banks’ NPL’s were getting headlines in the last quarter as they are on the rise here too.

In last week’s Weekly Wrap we told you the IMF has forecast that Italy would “not see their economy return to pre 2007 levels until the mid 2020’s and in that time the country would grow poorer compared with other eurozone countries, while its banks would continue to be heavily exposed to economic shocks”.

A core issue now is the battle between Rome and Brussels over how this is dealt with.  As was agreed at the G20 in Brisbane, the EU has a rule that banks must bail themselves out (“bail in”) by taking funds from shareholders, depositors and bond holders; as opposed to the government bailing them out, ala GFC. The Italian government wants to rescue the banks and protect the creditors.  All of those creditors are voters at a time when the Euro sceptic Five Star party is gaining serious ground (Itexit anyone?) and many are bond holders vital to propping up the entire Italian banking system.  Burn them once and the ensuing exodus could collapse the entire Italian banking system.

The article quotes a lawyer close to the negotiations:

“This could be a bigger risk than Brexit….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.”

Unlike the economic minnow of Greece, Italy is the EU’s 3^rd biggest economy…

Click here to read the full article.