Will Italian Banks Spark Another Financial Crisis?

Tyler Durden's picture

Submitted by Jeffrey Moore via GlobalRiskInsights.com,

In the 14th century, the Medici family of Florence began its rise to prominence, investing profits from a thriving textile trade to fund what would become the largest banking institution in Europe.  The success of the legendary banking family helped to usher in the Italian Renaissance and thus change the world. Now, Italian banks seem poised to alter the world yet again.

Shares of Italy’s largest financial institutions have plummeted in the opening months of 2016 as piles of bad debt on their balance sheets become too high to ignore.  Amid all of the risks facing EU members in 2016, the risk of contagion from Italy’s troubled banks poses the greatest threat to the world’s already burdened financial system.

At the core of the issue is the concerning level of Non-Performing Loans (NPL’s) on banks’ books, with estimates ranging from 17% to 21% of total lending.  This amounts to approximately €200 billion of NPL’s, or 12% of Italy’s GDP.  Moreover, in some cases, bad loans make up an alarming 30% of individual banks’ balance sheets.


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 the global financial markets to the brink, it is only the 44th largest economy in the world.  Italy represents the 8th largest economy in the world.

A deteriorating financial crisis in Italy could risk repercussions across the EU exponentially greater than those spurred by Greece.  The ripple effects of market turmoil and the potential for dangerous precedents being set by EU authorities in panicked response to that turmoil, could ignite yet more latent financial vulnerabilities in fragile EU members such as Spain and Portugal.

Such contagion should concern investors regardless of political assurances.  In 2008, then Federal Reserve Chairman Ben Bernanke infamously comforted inquiring congressmen when he stated that the crumbling subprime mortgage securities would be contained and posed no threat of contagion to markets overall.  The 2008 Financial Crisis, 50% market corrections, and the Great Recession ensued.

Could Italy represent the ‘subprime spark’ of 2016?  Currently, authorities assure the public that the banks are well capitalized and, though it may take some time, solutions will be realized.  Italian Prime Minister Renzi attempted to allay concerns after the recently struck deal with the EU, telling reporters that, “The situation is much less serious than the market thinks.”

If recent history is any indication, observers and investors should greet such statements by politicians with considerable caution.  In remarks during heightened concern over the Greek crisis in 2011, current European Commission President and then Prime Minister of Luxembourg, Jean-Claude Junker, stated “When it becomes serious, you have to lie.”

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KnuckleDragger-X's picture

Fun in Euroland, and it's not like the monetary union is falling apart or anything.....

Tom Servo's picture

Problem solved, just import a bunch of illiterate, 7th century, goat fuckers and all the problems will melt away...


Haus-Targaryen's picture

Süd-Tirol belongs to Austria. 

Tao 4 the Show's picture

Italians have plenty of bad qualities, but on the positive side they (the northerners at least) are hard workers and do a fairly good job with saving. The family ethic is still somewhat in play. There have been some trial balloons of old ladies losing their savings from bail ins and people were incensed If massive bail ins of 20-50% occur now, there is going to be some major anger.

Sandmann's picture

very good engineering companies

Sandmann's picture

Yes but Adolf agreed to leave it with his friend Benito

The Spanish Ambassador's picture

Let Austria hire a mercenary army of 7th century muzz and take it back. They should come cheap. Plenty of them hanging about.

winflation's picture

The south don't give a fuck as usual ... vaffanculo

sam i am's picture

Footage of a live mammoth captured by a camera of a German POW in 1943 in Yakutia


Tao 4 the Show's picture

Truly wild if that is true. There was a fun book by Michael Crichton recounting a supposed ancient manuscript that describes first hand account of Neanderthals. The book is a mix of historical info and imagination, but still really fun to read.

Clowns on Acid's picture

don't worry...importing a couple of million muslims will cure all Italian ills.

riot-police's picture

There will always be a few pennys for pasta.

Plus does the ECB not buy their junk?

lemontree2's picture

No problemo. Stawks at session highs. Oil up. Short squeeze. Transfer of wealth completed. Best regards central Banksters and the establishment.

Sudden Debt's picture

nothing changed since last year.

The only thing that changed is that the north is also entering a recession.

Babaloo's picture

I'm not clear on the chart.  Anybody know - is that percentages or what?

Captain Chlamydia's picture

Plan B - pronto! 

There is no plan B, never has been never will be. The tax payers will keep the swindlers at the banks and the lying hand puppeticians right where they are now. That is, after they pay for the hookers,  blow and the TBTF. 

Fuck the bankers, the politicians and the Mil Ind complex. 

TrustbutVerify's picture

In so many parts of the world the socialist or welfare mentality (one in the same) allowed loans to be made with little or no expectation of payback.  From the WSJ article from a year or so ago on USA-based school loans was a quote that went (paraphrase) "If I thought I was going to have to pay back the loans I would never have borrowed so much."  Greece is another example...does anyone realy expect Greece to pay money back?  What a joke.  Writ large, this is what's happened worldwide.  

The world didn't just drink the kool-aid, they swam in it.  

Lucky Leprachaun's picture

Just watch. The banks will stilll pay out bonuses.

Chuckster's picture

Geez Guys!  It's just play money anyway.  No need to have a coronary unless you are Sandmann.

Sandmann's picture

Sandmann knows Italy is No3 Borrower in the world and thinks there will be consequences.

adonisdemilo's picture

The nightmare that is the EU, soon to be was, is definitely FUBAR.

Keep on your present course as it's obviously the only course you know, following the lemmings off the nearest cliff.

Just complete the process to it's inevitability so that the scam called the UK referendum can't be fixed by Tory and UK traitor Cameron and his bunch of so-called Politicians.

silverliberty's picture

MY cousin in Rome is worried as hell.  5 years ago she laughed at me.  Last year, she was asking how to survive a collapse.   It all became real to her as all the promises from the Italian govt. concerning the aid promised to L'Aquilla after their earthquake in 2009 never appeared.  We had to drive by L'Aquilla to get to the family village.  Unfortunately, she is the only one I've been able to wake up. 

StychoKiller's picture

Yo handsome, Au/Ag solves a lot of problems, as we 'bots already know!

Theonewhoknows's picture
Theonewhoknows (not verified) Mar 7, 2016 2:01 PM

Hey everything according to the plan - especially with the levels of debt and plan perfected after one punching bag (Greece) executed. http://independenttrader.org/the-blueprint-of-the-fall-of-europe.html

GotNuttin'todo's picture

Will Italian banks spark another financial crisis?

Or French banks, or German banks or Spanish banks etc. etc.... ??

Villageidiot777's picture

Why is it always North-South to have such a big difference?

dearth vader's picture

History, climate and geology.

If the division bears any significance, in the southern hemisphere it should be the other way around.

Stifmeister's picture

While the answer is multi-faceted, long story short, the North has had to work harder in order to prepare for winter. The South, on the other hand, has it easy. Complacence leads to inactivity, which leads to a lower economic development. 

Abbie Normal's picture

Because in warmer climates, the grasshopper almost never starves so planning ahead is a foreign concept to them.

Irishcyclist's picture

It was the Bundesbank's Jens Weidman who said that if the Euro is to fail, it will not be in Athens but in Rome.

dogbert8's picture

Won't matter; the EU and ECB will bail them out with printed Euros, like they always do.  Gotta keep the money flowing, the debt rising, and the sheeple baaahing.

Serpiko's picture

This is why Italy is NOT in such a bad shape

sorry the article is in Italian


45North1's picture

Dear Europe, Italy is your foot.

And this is your foot with gangrene ....

Which way to the beach's picture

Jean-Claude Junker, stated “When it becomes serious, you have to lie.”

Was there ever a time when it wasn't serious?


Which way to the beach's picture


I wonder what Giuseppe Garibaldi, a free mason, who united Italy in 1860 would think of all this. It has been mostly downhill ever since. Entropy in action.