Will Italian Banks Spark Another Financial Crisis?
By Tyler Durden
The red flags initially attracted the attention of the European Central Bank (ECB), prompting an official inquiry that investors viewed as a flashing ‘sell signal.’ Shares of Italian banking companies lost more than 25% in the first several weeks of the year.
Though markets have pared losses in the last few weeks, March has brought renewed concern for the health of Italy’s financial sector. Adding more worries to fuel the fire, on Friday the ECB demanded that one such troubled Italian bank, Banca Carige SpA, provide new strategic plans and additional funding in order to bolster its balance sheet and meet supervisory requirements by the end of the month. The news sent bank shares on yet another swoon, prompting trading halts on several as the volatility triggered maximum loss ‘circuit breakers.’
A rock and a hard place
Initially, Italy proposed setting up a ‘bad bank’ solution, in which troubled institutions could off-load their NPL’s into a separate state backed entity that would manage the assets while insulating the sector at large from the damaging effects of non-performance. However, in an effort to protect taxpayers from socialized losses, new European Union rules now ban the use of state aid to bail out banks.
Instead of an overt ‘bail-out’, the most recent agreement Italy has reached with the EU constitutes a ‘bail-in’. In this agreement, banks will be allowed to cleanse their balance sheets by packaging the NPL’s and selling them to investors, along with enticing government guarantees for the least risky portions of the debt. The catch? The securities must be priced at market rates.
Mark-to-market rates for Italy’s NPL’s could be anywhere from 20%-50% below current listed value, representing steep losses for bondholders and uncomfortable write downs for the banks. This solution already resulted in such losses for bondholders in a 2015 ‘bail-in’ of four small Italian banks.
Those losses are not limited to financial institutions either. Rather, retail investors, or individual Italians, own significant portions of these debts as retirement savings. Citizens depending on these investments don’t have the luxury of financial engineering to make ends meet. Even the best ‘solution’ risks widespread financial suffering.
Italy is no Greece – it’s worse
Some have compared the risk of an escalating financial crisis in Italy to the seemingly perennial debt crisis in Greece that has ravaged European markets and tested European unity several times since 2008 as investors and EU members alike feared uncontrollable contagion. This has resulted in the multiple EU bail outs granted since then.
However, judging by the numbers it is clear that the financial risks posed by Italy are not comparable to Greece – they are far worse.
While Greece holds the top spot in the EU for the worst debt-to-GDP ratio, Italy comes in second place with a debt-to-GDP ratio greater than 132% according to Eurostat.
So what makes Italy so much worse? While Greece has more than once brought …read more
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