The Brexit Vote: Italy Hardest Hit?

People who follow the financial outlook of Europe have known for a while now that next to Greece, the most unsteady economy is Italy. But Greece is such a tiny sliver of the European economy that it didn’t matter that much except as a symbol of the resolve of the European Union to keep the party going. The Greek bailout was comparatively cheap.

Not so Italy. Its economy is one of the larger ones in Europe, and if its banking sector goes under, it could trigger a wholesale financial crisis in Europe like 2008. This chart from the Wall Street Journal shows part of the story:

Italian Loans copy

The Journal explains:

In Italy, 17% of banks’ loans are sour. That is nearly 10 times the level in the U.S., where, even at the worst of the 2008-09 financial crisis, it was only 5%. Among publicly traded banks in the eurozone, Italian lenders account for nearly half of total bad loans. Years of lax lending standards left Italian banks ill-prepared when an economic slump sent bankruptcies soaring a few years ago.

The U.K. vote to exit the European Union has compounded the strains on Europe’s banks in general and Italy’s in particular.

Naturally Italy’s crypto-socialist establishment wants to bail out its banks although this would violate European Union rules, as the Financial Times reports today:

Italy is prepared to defy the EU and unilaterally pump billions of euros into its troubled banking system if it comes under severe systemic distress, a last-resort move that would smash through the bloc’s nascent regime for handling ailing banks.

Matteo Renzi, the Italian prime minister, is determined to intervene with public funds if necessary despite warnings from Brussels and Berlin over the need to respect rules that make creditors rather than taxpayers fund bank rescues, according to several officials and bankers familiar with their plans.

The threat has raised alarm among Europe’s regulators, who fear such a brazen intervention would devastate the credibility of the union’s newly implemented banking rule book during its first real test.

Italy feels emboldened to go its own way, because Brexit!

Bloomberg reported yesterday that the coming Italian crisis not only could start a new financial crisis, but could unravel the EU’s economic regime:

Italy’s banking crisis could spread to the rest of Europe, and rules limiting state aid to lenders should be reconsidered to prevent greater upheaval, Societe Generale SA Chairman Lorenzo Bini Smaghi said.

“The whole banking market is under pressure,” the former European Central Bank executive board member said in an interview with Bloomberg Television on Wednesday. “We adopted rules on public money; these rules must be assessed in a market that has a potential crisis to decide whether some suspension needs to be applied.”

Change the rules? We’ve got the perfect person for the EU: FBI director James Comey. He’s got proven capacity to change the rules for distressed parties that are “too big to jail fail.”

Meanwhile, more bond yields around the world slipping into negative interest rates. This can’t end well.

Responses