Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Dow Stock Market Dow Trend Forecast Current State - 22nd Apr 21
Gold Rebounds Amid Positive Economic Reports - 22nd Apr 21
China's record first quarter fuels strong expansion in 2021 - 22nd Apr 21
Gold Price Next Key Level - 22nd Apr 21
Here's What to Look For When Hiring a Real Estate Agent - 22nd Apr 21
Ethereum EIP 1559 and Raven Coin - 21st Apr 21
Gold, USDX: The Board is Set, the Pieces are Moving - 21st Apr 21
World Economies Need to Find a Lot More COPPER! - 21st Apr 21
DogeCoin CRASH! Time to Start Mining BOODGIE Coin! Crypto Mania 2021 - 21st Apr 21
Pausing Stocks and Gold Fireworks - 21st Apr 21
Precious Metals and Miners Start of New Longer-Term Bullish Trend - P2 - 21st Apr 21
Looking For A Mortgage Broker? Here Is How To Hire One - 21st Apr 21
Amazon AMZN Stock PRIMEDAY SALE! Trend Analysis - 20th Apr 21
Stock Market Sentiment Speaks: You May Not Believe My 2021 Targets - 20th Apr 21
Stock Market Phase Two Projection - 20th Apr 21
Are Precious Metals & Miners Starting A New Longer-Term Bullish Trend? - 20th Apr 21
Inflation: First the Gain, Then the Pain… - 20th Apr 21
8 Stock Market Indicators in 1: Here's the Message of the Panic/Euphoria Model - 19th Apr 21
Gold - You Can Win a Battle, but Still Lose the War - 19th Apr 21
Will Interest Rates Rally Further Push Gold Price Down? - 19th Apr 21
Gold Fireworks Doubt the Official Inflation Story - 19th Apr 21
YuanPay Team Discuss The Process Of Crypto Diversification - 19th Apr 21
Central Banks May Ramp Up Gold Buying - 18th Apr 21
How to Get Rid of Driveway Weeds With Just WATER! 6 Months later NO Weeds, Ultimate Killer! - 18th Apr 21
State of the European Markets - DAX, FTSE, CAC, AEX, SMI, IBEX 35, S&P/MIB, Euro Stoxx 50, RTS - 18th Apr 21
Einvestment Fund: What You Need To Know About Investments - 18th Apr 21
Google Alphabet (GOOG) AI Deep Mind Stock Trend Analysis - 17th Apr 21
Stocks and Bonds Inflationary Slingshot - 17th Apr 21
Best Smartphone Selfie Stick Tripod Review by ATUMTEK Works with Samsung Galaxy and Iphone - 17th Apr 21
How to Give Budgie's First Bath | Easy Budgie Bathing and Water Training with Lettuce - 17th Apr 21
Record-breaking Decrease in New Passenger Vehicle Sale in Europe - 17th Apr 21
US Stocks Climb A “Wall Of Worry” To New Highs - 16th Apr 21
Gold’s Singular Role - 16th Apr 21
See what Anatomy of a Bursting Market Bubble looks like - 16th Apr 21
Many Stock Market Sectors Are Primed For Another Breakout Rally – Are You? - 16th Apr 21
What Skyrocketing US Home Prices Say About Inflation - 16th Apr 21
Still a Bullish Fever in Stocks? - 16th Apr 21
Trying to Buy Coinbase Stock on IPO Day - Institutional Investors Freeze out Retail Investors - 15th Apr 21
Stocks or Gold – Which Is in the Catbird Seat? - 15th Apr 21
Time For A Stock Market Melt-Up - 15th Apr 21
Stocks Bull Market Progression Now Shows Base Metal Strength - 15th Apr 21
AI Tech Stocks Buy Ratings, Levels and Valuations - 14th Apr 21
Easy 10% to 15% Overclock for 5600x, 5900x, 5950x Using AMD Ryzen Master Precision Boost Overdrive - 14th Apr 21
The Current Cannabis Sector Rally Is Pointing To Another Breakout - 14th Apr 21
U.S. Dollar Junk Bond Market The Easiest Money in History - 14th Apr 21
The SPY Is Nearing Resistance @ $410… What Is Next? - 14th Apr 21
The Curious Stock Market Staircase Rally - 14th Apr 21
Stocks are Heating Up - 14th Apr 21
Two Methods in Calculating For R&D Tax Credits - 14th Apr 21
Stock Market Minor Correction Due - 13th Apr 21
How to Feed Budgies Cucumbers - Best Vegetables Feeding for the First Time, Parakeet Care UK - 13th Apr 21
Biggest Inflation Threat in 40 Years Looms over Markets - 13th Apr 21
How to Get Rich with the Pareto Distribution - Tesco Example - 13th Apr 21
Litecoin and Bitcoin-Which Is Better? - 13th Apr 21
The Major Advantages Of Getting Your PhD Online - 12th Apr 21
Covid-19 Pandemic Current State for UK, US, Europe, Brazil Vaccinations vs Lockdown's Third Wave - 12th Apr 21
Why These Stock Market Indicators Should Grab Your Full Attention - 12th Apr 21
Rising Debt Means a Weaker US Dollar - 12th Apr 21
Another Gold Stocks Upleg - 12th Apr 21
AMD The ZEN Tech Stock - 12th Apr 21
Overclockers UK Build Quality - Why Glue Fan to CPU Heat sink Instead of Using Supplied Clips? - 12th Apr 21 -
What are the Key Capabilities You Should Look for in Fleet Management Software? - 12th Apr 21
What Is Bitcoin Gold? - 12th Apr 21
UK Covd-19 FREE Lateral Flow Self Testing Kits How Use for the First Time at Home - 10th Apr 21
NVIDIA Stock ARMED and Dangeorus! - 10th Apr 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Italy, Germany, and the EU Are on the Brink of a Conflict

Politics / European Union Jan 11, 2017 - 05:25 PM GMT

By: John_Mauldin

Politics

BY CHEYENNE LIGON AND ALLISON FEDIRKA : As a new year begins, we look at a key forecast that will bridge 2016 and 2017: the Italian banking crisis. In Geopolitical Futures’ 2016 forecast, we said that the focal point of Europe’s financial crisis would shift from Greece to the Italian banking system. For 2017, we forecast that the evolution of this crisis will eventually force a confrontation between Italy, Germany, and the European Union. Here, we establish a starting point for the looming Italian banking crisis in 2017, which will unfold over many months and have a range of consequences.


The key bank to watch

Italy’s banking crisis currently pivots around the fate of Banca Monte dei Paschi di Siena (MPS). The bank spent 2016 trying to shed 28 billion euros ($29.6 billion) in non-performing loans (NPLs), which account for 36 percent of the bank’s loan portfolio. That is the highest proportion of NPLs of any Italian bank.

As a result, investors and depositors began taking out their money. This added to the bank’s financial crisis by creating a liquidity problem. In December, MPS said that its remaining 11 billion euros in liquidity would only last until April.

The bank’s efforts to privately solve its financial woes failed, leaving the Italian government as the bank’s last recourse. MPS spent the fourth quarter of 2016 seeking 5 billion euros of capital and a fund to underwrite it. The bank failed to meet its December 22 deadline, after the deal’s largest backer pulled out at the last minute.

With the private sector and outside financial institutions reluctant to help, MPS asked the Italian government for aid. On December 23, the Italian Cabinet said that the bank would be rescued with a 20 billion euro fund approved by Parliament.

The next obvious question is will 20 billion euros be enough to save MPS? While the sum would meet MPS’ immediate needs, estimated at about 8.8 billion euros, many independent researchers believe it will not save the bank in the long run. Goldman Sachs estimates that successful recapitalization would require 38 billion euros. A senior market analyst at London Capital Group suggests the number might be closer to 52 billion euros.

The broader consequences

As a member of the eurozone, Italy’s banking crisis is not just an Italian problem. Uncertainty in the Italian market could lead risk-averse investors to stay away from Italian assets and thus the euro, impacting its value.

Also, should MPS or other large Italian financial institutions fail, Italy would sink into an economic crisis that would have severe effects on other EU members and the value of the euro.

Italy, in theory, also needs to comply with EU regulations. The divergence between Italy’s needs and the EU’s needs has made finding a solution acceptable to both parties very difficult. Italy wants to protect taxpayers while the EU wants depositors, not the European Central Bank (ECB), to assume the burden of debt.

The solution thus far has been to promote a plan in which Italy appears to be following EU regulations, but which provides enough wiggle room to protect the bank’s domestic investors. Article 32 of the EU’s Banking Recovery and Resolution Directive, which took effect at the beginning of 2016, states that banks must go through a “precautionary recapitalization,” also known as a bail-in, before they can get state funds. This is meant to protect taxpayers from bearing the entire burden of a bailout.

In MPS’ case, this would mean that bondholders must take an 8 percent loss in assets before the government can inject capital into the bank. However, the ECB is negotiating a plan with the Italian government in which the bank could protect these retail investors by swapping their riskier junior bonds for more stable senior ones.

Germany, as de facto leader of the EU, is the main force behind the ECB’s opposition to bailouts. Germany has elections in 2017 and is also facing a looming crisis due to falling export demand. Politically and economically, it cannot keep propping up the eurozone.

The EU must walk a fine line of being flexible enough to avoid financial collapse, but stringent enough to preserve the union’s institutional integrity—at least what remains of it. But Italy’s December 4 constitutional referendum gave the Italian government more leverage. Italian voters rejected former Prime Minister Matteo Renzi and his negotiator approach with the EU. This reflects the public’s growing desire for Italy to do what is best for Italy, even at the expense of the EU.

Domestic political implications

These economic problems naturally affect the lives of average Italians. Problems like inflation, stagnating growth, and unemployment affect their pocketbooks. A 4 billion euro bail-in for four smaller Italian banks in 2015 led to protests, after 130,000 bank shareholders and bondholders lost their investments. Renzi was fiercely criticized, and residual anger drove many voters into the arms of anti-establishment parties.

Paolo Gentiloni, Italy’s new prime minister, has asked the EU to let Italy protect retail investors to avoid a repeat of Renzi’s experience. An estimated 40,000 households in Italy hold 2 billion euros of MPS’ subordinated bonds. The loss of life savings for 40,000 families in Italy could spark unrest and lead to a flare-up in anti-EU sentiment.

All parties understand that if the EU does not allow the Italian government to protect its retail investors, nationalist parties like the Five Star Movement and the Northern League will become more popular. Both parties have promised a Brexit-style referendum if they come to power in Italy’s 2018 elections. It would also cause public pressure that the future prime minister, to be selected early this year, could not ignore.

This would not only jeopardize the frail political and economic landscape in Italy, but also the entire eurozone. While MPS is just one bank, the ripple effects of its failure would be numerous and deep. This would severely escalate the crises already underway. The bank’s salvation would allow Italy and the EU to fight another day, but it’s a far cry from solving the underlying structural causes of Italy’s problem.

Grab This Free Report to See What Lies Ahead in 2017

Now, for a limited time, you can download this free report from Mauldin Economics detailing the rocky roads that lie ahead for three globally important countries in 2017—and how the economic fallout from their coming crises could affect you. Top 3 Economic Surprises for 2017 is required reading for investors and concerned citizens alike. Get your free copy now.

John Mauldin Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules