Crying All the Way to the Bank

With almost of third of Italian companies unable to meet their financial obligations and tons of borrowing over the past few years predicated on a projection of meaningful growth – which has not materialized, hovering at 0.3% right now, and projected to stay low for the foreseeable future (youth unemployment is a staggering 27%) – Italy is facing a banking crisis like no other. Most Italian banks have seen their share prices plummet 30-50% with some of the biggest Italian banks experiencing a rapid decline to worthlessness, falling well over 80% in value. 30% of that fall since Brexit was announced in June.

In late November, the Financial Times summarized the debacle like this: “There are €360bn of impaired loans in the system, according to the Bank of Italy; €200bn of these are of the worst sort, the non-performing sofferenze [literally, “suffering losses”]. This is a huge number given that there is €225bn in equity on the books of the banking system. And this may understate the rot. Banks close to being bust have reason to mark the value of their assets generously." One euro (€) is worth about $1.08 at today’s exchange rates. It could be that the entire aggregation of Italian banks are… er… worthless. The bank default rate in Italy runs at three to five times the default rate in the “Nordic” EU countries.

There is an immediate need for a first stage bailout for Italian banks of €52bn (staring with smaller initial tranches) with a very strong possibility for more not too far behind. But that’s where the problems really begin. You see, lots of ordinary citizens – we call them “voters” – have been the mainstay of bondholders in the Italian banking system. Bonds have better returns than mere deposits, even though ordinary Italians really do not know the difference. But that’s the catch. EU bank bailout rules require investors (shareholders and bondholders) – as opposed to taxpayers -- to carry the burden of any rescue; their investments/holdings are the sacrificial lambs. Effectively, any such EU bailout would wipe out the life savings of millions of ordinary Italians. Think of how popular a government that would let that happen would be. But its gets worse, much, much worse.

Rumors abound, however, that it is the Italian government itself that would mount the first such bailout, without resort to the EU, but questions remain about whether or not such an intervention might (a) be in contravention of EU rules or (b) whether such a move is way too little, way too late. Still, denial and rumor are powerful market forces: “Shares in Monte dei Paschi, one of Italy's most troubled banks, rose nearly 9% on new hopes of a rescue… Reports suggested the government was poised to step in and prop up the bank and other ailing lenders… However, an Italian Treasury spokesman denied that the government was seeking a bailout loan from the EU… La Stampa newspaper had reported that Rome would be asking for €15bn (£12.7bn; $16.1bn) from the European Stability Mechanism (ESM) [see discussion below] to help the Italian banking system… At the same time, Reuters quoted unnamed sources as saying that the government would take a €2bn controlling stake in Monte dei Paschi after the prospect of a private recapitalisation receded.” BBC.com, December 7th.

Experts say Italy probably doesn’t have the wherewithal to salvage its own banking system, under the unified euro currency system, without some massive outside help. The clock is ticking. The November 28^th Telegraph (a U.K. newspaper), explains: “Sources in Rome say the Italian government may have to turn to the … ESM for a bank rescue, a humiliating and painful course that must be approved by the German Bundestag and other EMU [Economic and Monetary Union] parliaments. It would amount to a partial ‘Troika’ administration under terms dictated by the EU." What do you want to bet that turning over financial control to, effectively, angry Germans also isn’t going to go over too well among those Italian voters?

Hmmm… are we seeing the potential of Italexit from the European Union over banking? Can the EU even survive if another major state pulls out? Well that populist/nationalist trend that brought us Brexit, Donald Trump and a whole host of anti-globalist politicians throughout Europe – are you watching the French election process? – is exploding in Italy, the country that brought us the pre-Trump Trump-like Silvio Berlusconi as Prime Minister (felon extraordinaire) a few short years ago.

“On Sunday [12/4], a majority of Italians voted against legislative revisions in a referendum, according to major exit polls. Italian Prime Minister Matteo Renzi, who had pushed for [serious constitutional parliamentary “streamlining”] changes and was forced to call the referendum, admitted defeat Sunday evening and announced that he would hand in his resignation… 

“[Sitting in the wings was an outspoken Trump-like populist, who however draws his power from the left… When Giuseppe Piero "Beppe" Grillo – pictured above left] started to make headlines as the leader of Italy's biggest protest party more than six years ago, it was hard to avoid the puns. A comedian turned politician, Grillo was laughed at and branded a ‘clown.’

“But by 2013, the laughing subsided, and German magazine Der Spiegel already had called him ‘the most dangerous man in Europe.’ Three years later, he may finally be living up to that description, his critics say…

“Renzi's resignation could ultimately sweep Grillo's left-leaning and anti-establishment Five Star Movement party into power — and throw Europe into an economic and potentially political crisis. Grillo has for years advocated a referendum on Italy's euro zone membership status. Such a referendum would destabilize Italy's fragile economy and, particularly, the country's banks. After the release of the first exit polls Sunday evening local time, the value of the euro against the dollar immediately fell. 

“After Sunday's referendum, Grillo appeared confident about the future prospects of his party, when he tweeted: ‘A lesson for everyone: you can't lie forever to the people without suffering consequences.’

“On his website, Grillo argued that new elections should take place as soon as possible. ‘The regime's propaganda and all of its lies are the first losers in this referendum,’ Grillo wrote. ‘Times have changed. The sovereignty belongs to the people again — and now we will really start to apply our constitution.’” Washington Post, December 5^th. Did somebody say, “tweeted”?

Grillo has his own version of “draining the swamp,” and kowtowing to German bankers is not remotely part of that effort. Will he succeed? Or will a new election or a technocrat interim government stop this nascent anti-European Union sentiment from germinating? Time will tell. But in a world with populist echoes all over the developed Western world, exactly how much instability is required before a full-on global market collapse? Hang on, we are probably in for a very, very rough ride… even here, about 5,000 miles from the crisis.

I’m Peter Dekom, and in a world that is increasingly fostering nationalism and isolationist vectors, we are about to learn how irretrievably global our economy truly is.