Why Europe’s next crisis may be in Italy

[GennGreymane]

http://www.economist.com/blogs/econo...ismaybeinitaly

REVERBERATIONS from Britain’s vote to leave the European Union have travelled from the Thames to the Tiber. Italian banks’ shares have plunged: Monte dei Paschi di Siena, the third-biggest (and the world’s oldest), has lost half its value since the Brexit vote. This has prompted Matteo Renzi, the prime minister, to propose recapitalising the weakest banks with public money. But there is a snag: many Italian savers own bank bonds, which under EU rules stand to be written off if lenders receive state aid. Can Mr Renzi save both the banks and the bondholders—and his job?

Italian banks are labouring under Europe’s biggest bad-loan burden: €360m ($400m), or 18% of the total, the product of years of economic stagnation and questionable lending. Several other countries, including Britain and Germany, spent oodles bailing out banks after the crisis of 2008. Italy, facing less acute problems, did not. The bad loans meanwhile piled up: writing them down further or selling them will eat capital, which needs replenishment. The EU rules—tightened in the past three years—say that additional capital should come from the private sector. Although some banks can turn to the markets, others are too weak. A fund set up recently by the financial industry to recapitalise frail lenders and buy bad loans has already used much of its money.

Mr Renzi wants to protect bondholders at all costs. When investors were soaked after the rescue of four tiny banks last November, uproar ensued—and a man killed himself. A repeat may seal the prime minister’s defeat in a referendum in October on constitutional reform, on which he has staked his premiership. For the European Commission, which oversees state aid, the stakes are also high. This is the first test of its tighter rules, and if they are bent out of shape to suit Mr Renzi they will no longer be credible.

Officials from Italy and the commission are trying to find a way of permitting a bail-out without either breaking the rules or bashing the bondholders—perhaps involving "precautionary” recapitalisation. The results of “stress tests” of European banks, due on July 29th, which may show up weaknesses at Monte dei Paschi and elsewhere, add urgency. It is in both sides’ interest to use whatever wriggle room there is. So soon after the Brexit vote, the EU can ill afford a bust-up between Brussels and a founding member state.

[VirginiaIsForLovers]

Let's hope italy has to moth ball its navy and doesn't go out looking for migrants to bring home.

[baatora]

The constitutional reform is uber shit.
Renzi binded the result of the constitutional reform to his term of office.
He knows than if we vote against the constituition reform we know that noone will manage this crisis (if we vote again the populist of M5S would win 100%, and that would be VERY bad), if we vote for it we would accept a bad constitutional reform.

/yay

[alexw]

The constitutional reform is uber shit.
Renzi binded the result of the constitutional reform to his term of office.
He knows than if we vote against the constituition reform we know that noone will manage this crisis (if we vote again the populist of M5S would win 100%, and that would be VERY bad), if we vote for it we would accept a bad constitutional reform.

/yay

Tbh you need to elect M5S. There is no getting out of the mess you are in while still in the Euro. It just doesn't work and the Germans will never let it since that would mean a proper central bank, burden sharing, fiscal transfers, etc. The Germans just want an undervalued Euro for their economy and the rest can go hang, and I don't see any other party willing to break the deadlock except M5S. The other parties will just continue the slow process of the asphyxiation of the Italian economy while lying to you about it.

[AeneasBK]

Someome told me Italy was like 6th largest economy 20 years ago.

I mean, was it *all* Burlusconi's fault or?

[Deleted]

Someome told me Italy was like 6th largest economy 20 years ago.

I mean, was it *all* Burlusconi's fault or?

4th economy in 86. Above france and UK.
Berlusconi was the result of a vacuum created by a political sweep up in the early 90's. Italy before then was unrecognizable. Events like Sigonella showed our politicians had minds of their own.
Since then it's only been a shadow of itself. Great industries mismanaged or sold, managerial sector absolutely appalling, political sector not up to standard.
And this is the result.

[Independent voter]

Time for Germany to get the pocket book out.

[Acidbaron]

Bit of old news, few weeks old actually

Italy economy is large so it will recover, due to previous crises we already have several things in place in Europe to actually minimize the harm of a bank crises.

[alexw]

Someome told me Italy was like 6th largest economy 20 years ago.

I mean, was it *all* Burlusconi's fault or?

Italy's economy is now smaller than it was in 2000 so its dropped way down the ranking from where it was. The blame basically lies on the Euro currency and on Germany which has tailored the system for its own benefit to the detriment of the southern economies. The solution requires Italy to either leave the Eurozone (not the EU thats a different thing entirely), or for the Euro system to function as a true shared currency instead of as a currency board. I don't see the Euro ever functioning as a true currency since the Germans won't let it. That means at some point the masses will become fed up enough in the periphery nations that one of them elects a populist government which will take their nation out of the Euro, then causing a domino like effect resulting in the breakup of the eurozone system.

[Deleted]

Can you summarize the reason?
I get awfully tired from reading that financial mumbo jumbo.

Someome told me Italy was like 6th largest economy 20 years ago.

I mean, was it *all* Burlusconi's fault or?

No, it's Mussolini and by extension germany.
That way you can guilttrip Merkel into buying every italian a golden car.

[Paklaaji]

Knowledgeable people have been saying and predicting this for MONTHS.

https://geopoliticalfutures.com/ital...temic-failure/
https://geopoliticalfutures.com/the-...uropes-crisis/
https://geopoliticalfutures.com/euro...g-bank-crisis/

A part of their 2016 forecast back in late 2015 was that Italy`s crisis will emerge and become the issue for months/years ahead.

Greece was an outlier. Italy is where the fate of EU and Euro as currency will be decided.

[Deleted]

Bit of old news, few weeks old actually

Italy economy is large so it will recover, due to previous crises we already have several things in place in Europe to actually minimize the harm of a bank crises.

You're right in saying Italy's economy is large and it will recover.
More than recover by itself, they will make it recover. Italy is one of those "too big to fail" cases. A collapse similar to what we witnessed in Greece Portugal and Ireland, happening in Italy would have MASSIVE consequences.

[alexw]

Can you summarize the reason?
I get awfully tired from reading that financial mumbo jumbo.


No, it's Mussolini and by extension germany.
That way you can guilttrip Merkel into buying every italian a golden car.

Its not explainable without explaining it in financial terms since the reasons why Italy is doing so poorly lie in macro-economics.

[Damajin]

http://www.newsmax.com/Finance/Marke.../06/id/737249/

Italy May Spur Systemic Bank Crisis, SocGen Chair Says

Italy’s banking crisis could spread to the rest of Europe and rules limiting state aid to lenders should be reconsidered, 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 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.”

With Italian banks weighed down by about 360 billion euros ($389 billion) in soured loans, the government has been sounding out regulators on ways to shore up lenders amid a renewed selloff in the wake of the British referendum to leave the European Union. The government would invoke an EU rule allowing temporary state aid if regulatory stress tests uncover a shortfall at Banca Monte dei Paschi di Siena SpA, a person with knowledge of the discussions said Tuesday.

Despite the struggling market, it’s important to protect European banking rules set up in recent years, Klaus Regling, CEO of the EU Stabilization Fund, said in a separate television interview. Many solutions under the existing rules are still available to Italy, he said.

"The Italian government is in a dialogue with the European commission on how to apply the framework to these specific circumstances,” Regling said. “I am confident they will find a way."

Europe’s banking market faces the risk of a systemic crisis unless governments accept the idea of taxpayer money as the ultimate recourse in a crisis, Bini Smaghi said. Any intervention should be as swift as possible, he said.

Both Italy and Germany have too many banks that are not profitable and more consolidation is needed, the chairman said. Italy must do more to deal with non-performing loans and Prime Minister Matteo Renzi will have to take politically unpopular steps including cost cuts and job reductions, he said.

“What’s needed is a European solution,” he said. “So far, we’ve had national solutions. We need a clear backstop.”

On Brexit, Bini Smaghi said he expects “very long” negotiations. He expressed concern that Britain’s proposal to reduce corporate taxes to attract companies could lead to risky tax competition across Europe.

So the comment on taxpayer dollars shows they're looking to pull a Wall Street bailout situation in Europe now, just to try to protect the Too Big To Fails which of course worked oh so well for US taxpayers and at the same time hold together the Eurozone since Italy stands to be the next one out the door otherwise.

[alexw]

You're right in saying Italy's economy is large and it will recover.
More than recover by itself, they will make it recover. Italy is one of those "too big to fail" cases. A collapse similar to what we witnessed in Greece Portugal and Ireland, happening in Italy would have MASSIVE consequences.

Will it? Are you saying Germany is going to fundamentally change its stance on issues relating to the Euro and its economy? That for example Germany will try and reorientate its economy to run a trade deficit? Or that it will be willing to undertake permanent fiscal transfers akin to what it did for East Germany upon unification?

Italy CANNOT recover unless some of these things happen. Its simply impossible.

[Deleted]

Will it? Are you saying Germany is going to fundamentally change its stance on issues relating to the Euro and its economy? That for example Germany will try and reorientate its economy to run a trade deficit? Or that it will be willing to undertake permanent fiscal transfers akin to what it did for East Germany upon unification?

Italy CANNOT recover unless some of these things happen. Its simply impossible.

Well it's either that or the collapse of the EU.

[Deleted]

The blame basically lies on the Euro currency and on Germany which has tailored the system for its own benefit to the detriment of the southern economies. The solution requires Italy to either leave the Eurozone

All this blame on Germany, yes you can temporary boost the economy by increase inflation, but it do not helpe in the long run, the underlying cause of why you need to boost the eonomy is stil there, but now you have a eternal fight to hold down inflation at acceptable levels, and interest rates will go up. Making it harder to borrow for new investments.

What Euro have done is given southern Europa a grace time to fix the underlying cause in its economy (close to zero interest rate) and countries like Greece have failed to use the time wisely. Still a bit sour that Sweden withdrew its Olympic Games application, becuse we can not afford it, and now we have to suport Greece who did have Olympic Game....and obvious did not abel to afford it.

Italy planning to buy a bunch of F-35 is that somthing you shall do if your economy is bad? Do the Italy realy need a €1 billion new aircraft carrier? Particularly then they already have already two.....

[alexw]

All this blame on Germany, yes you can temporary boost the economy by increase inflation, but it do not helpe in the long run, the underlying cause of why you need to boost the eonomy is stil there, but now you have a eternal fight to hold down inflation at acceptable levels, and interest rates will go up. Making it harder to borrow for new investments.

What Euro have done is given southern Europa a grace time to fix the underlying cause in its economy (close to zero interest rate) and countries like Greece have failed to use the time wisely. Still a bit sour that Sweden withdrew its Olympic Games application, becuse we can not afford it, and now we have to suport Greece who did have Olympic Game....and obvious did not abel to afford it.

I did not mention inflation. Though the deflationary trend is a part of it.

No the real problem is Germany's trade surplus. Germany has engineered its economy to run a permanent trade surplus. That means it earns more than it spends. That has to be balanced by other nations spending more than they earn. I.e they take on more and more debt. So the very fact Germany runs a trade surplus as it is doing keeps loading up Italy, etc, with more and more debt. At the same time Germany keeps telling Italy to cut and cut and cut to stop the debt load rising. But as I've show that can't work because Italy's rising debt IS an artifact of the German trade surplus.

The whole reason people mention inflation is to use inflation to cause German wages to rise while Italian wages are held constant, ergo shrinking the Germany trade surplus. But of course Germany is exceedingly proud of its trade surplus. They don't want it to end. But the only way Italy, etc, can get out of the mess they are in is IF that trade surplus disappears.

So your talk about "fixing" Italy, Greece, etc is nonsense. It literally cannot happen without Germany making internal changes it does not want to do. The other option is of course the break up of the Euro, whereupon the new Italian currency will fall in value wiping out the German trade surplus no matter the desires of the German nation and its elites. And since I don't expect Germany to change then the only other option is for the Euro to break apart. If there are only two options a) or b) and a) is never going to happen then b) at some point must.

- - - Updated - - -

Well it's either that or the collapse of the EU.

Well the EU and euro are different things. Its the euro that will collapse. The EU may/may not.

[Yvaelle]

Well the EU and euro are different things. Its the euro that will collapse. The EU may/may not.

^ Bears repeating.

The problem that virtually every country in the EU is struggling with is not the economic union at all - it's having disparate economies sharing a single currency.

The EU is a great idea. The Euro (currency) is a recipe for volatility.

Which makes the Brexit vote all the more bizarre, since they had all the benefits of the EU without the Euro-problems.

[Deleted]

No the real problem is Germany's trade surplus.

So build better or cheaper goods then Germany, can they do it so can Italy. Remember Greece barging about how long work hours they have and complain how badly paid they are, so they are in a golden position.