Italy: The ongoing banking crisis back front & centre again

Two small Italian banks, Popolare di Vicenza and Veneto Banca, recently reported their 2016 fiscal positions that showed losses of 1.9 billion euros ($2 billion) and 1.5 billion euros ($1.65 billion), respectively. Both banks have slipped below the EU mandated requirements for managing bad debt leading to erosion of their capital reserves. Though these two banks are small they are the ‘canaries in the fiscal coal mine’ when it comes to assessing the current overall financial problems besetting Italy. There is currently a total 360 billion euros of non-performing loans in the Italian banking system, making the sector extremely fragile.

Monte dei Paschi

Precedence setting mini-banks like Popolare di Vicenza and Veneto Banca, have a outsized influence on setting the rules underpinning the setting of controls and limits on the largest banks in Italy. Precedence setting on how the European Central Bank treats Italy’s large banks are administered, based on such weak guidelines is causing investors across the sector to re-evaluate their investments.

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On the brink of Article 50’s implementation: BREXIT HAPPENED FOR A REASON: EU MEMBERS LIKE POLAND OUGHT TO REASSESS

Polish Prime Minister Beata Szydło wrote a curiously desperate letter of last resort to the European Union to prevent the re-election of her Eurocrat predecessor, Donald Tusk. She appealed to democracy and national sovereignty. This must have sounded like a joke to the Eurocratic team that decided whom to choose. But all was in vain. Poland alone cast the dissenting vote. Representatives of twenty-seven other EU countries voted for the reelection of Tusk.

Polish Prime Minister Beata Szydło

 

Poland’s former liberal prime minister Donald Tusk of the Civic Platform (PO) party has just been reelected as the president of the European Council (EC). The election has occurred against the explicit wishes of Poland’s current populist government of the Law and Justice Party (PiS). On the one hand, Tusk’s victory has triggered much gloating in the Europhoric, globalist, and German circles. On the other hand, it has prompted confused fury and embarrassment in the Polish ruling circles.

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More nonsense doom and gloom from the always politically predictable ‘warmists’

Climate Change is more real, and dangerous, and worrying than ever before because lots of bad weather has happened around the world.
Now that I have handily summarised the World Meteorological Organization’s (WMO) latest report — WMO Statement on the State of Global Climate in 2016  <http://reliefweb.int/sites/reliefweb.int/files/resources/1189_Statement2016_EN.pdf> — you have no need to read it.

NOAA

That’s because the report’s only intended function is as a propaganda device to prop up the global climate alarmist narrative.

You can tell this because of certain key phrases that have been embedded in the “Executive Summary.”

Phrases like:


Warming continued in 2016, setting a new temperature record of approximately 1.1 °C above the pre-industrial period…

…against a background of long-term climate change….

Severe droughts affected agriculture and yield production in many parts of the world, particularly in southern and eastern Africa and parts of Central America, where several million people experienced food insecurity and hundreds of thousands were displaced internally…

Detection and attribution studies have demonstrated that human influence on the climate has been a main driver behind the unequivocal warming of the global climate system…

Human influence has also led to significant regional temperature increases at the continental and subcontinental levels. Shifts of the temperature distribution to warmer regimes are expected to bring about increases in the frequency and intensity of extremely warm events.


But most of this stuff just comes from the IPCC’s Fifth Assessment Report, which was published in 2014. What, exactly, is its relevance to a new report on last year’s weather?

Short answer: none — but this was never the point.

 

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BREXIT Article 50 trigger to be pulled by the end of March 2017

The British Prime Minister Theresa May has finally won the power to trigger the BREXIT Article 50, after the Lords, upper house, backed down and passed the Brexit Bill. Two crucial votes in the House of Commons allowed May to trigger the bill to pull the UK out of the European Union. It was thought that if the ‘soft’ option was blocked, either by rebel Tories in the Commons, or by the Lords, then May would go with the ‘nuclear’ Hard Exit Option on BREXIT. Earlier Tory MPs knuckled down to the will of the Whips and withdrew their amendment, guaranteeing the rights of EU nationals currently working in the UK. It also gave short shift, calling the bluff of EU threats against British workers currently domiciled in the EU countries. The BREXIT triggering bill backed the May Government 335 to 287, majority 48.

AP

The Commons MPs also defeated a second amendment on the timetabling of votes at the end of the negotiation. After a long debate the Lords agreed not to contradict the will of the elected chamber. A Tory peer, Viscount Hailsham, who had previously voted in favour of the amendment  said tonight: “We have asked the Commons to think again, they have thought again, they have not taken our advice, and our role now I believe is not to insist.”

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The US Fed’s plan for Rate Hikes and the resulting fallout in 2017

Donald Trump’s election has increased the expectation further Federal Reserve rate hikes. The recent hike in the Fed’s interest rates, only the second such hike in the past decade, may be the foretaste of up to Three further rate hikes during 2017.

FRB

 

Trump’s  campaign platform was based on stimulus policies that would both increase economic activity — through infrastructure investment,  corporate tax  cut to 15%,raise tariff barriers to imports resulting in  boosting prices domestically. Such plans on the back of interest rate rises are recipes for higher inflation.

One of the Fed’s key jobs is to stabilise prices , by adjusting interest rates. In fact interest rate manipulation is one of the few remaining effective tools left in its financial tool kit. Higher cost of money however nominally brings with it inflationary pressures that could compound and set of an inflationary spiral. The chances of that however are remote given the record low levels of current inflationary pressure.

Given the likelihood of three planned modest rate rises during 2017, the chances of an inflationary spike is remote however, for the remainder of Federal Reserve Board Chair Janet Yellen’s term. In 2018, her position will be up for renewal, raising the possibility that she might be replaced by a Fed Chairman less receptive to interest rate hikes, particularly if the Trump administration proves to be more interested in  sustaining growth. For the time being, the Trump economic policy path to higher spending, higher inflation and higher rates resulting in a stronger dollar appears to be set.

The interest rate gap between the United States and other major currencies like Japan and the eurozone, both of which have negative interest rates and are deep in bond purchasing, is noteworthy. Such Interest Rate divergence among the world’s major central banks is historically rare, and as the disparity grows, it will boost the gains to be made by borrowing in the lower-rate countries and lending in the higher-rate ones, such as the US, especially if the US economy ‘takes off’.

Such flows of capital among the world’s major centers can be destabilising to weaker economies as was shown with the EU after the recent US Fed rate hike.  The Bank of Japan in particular stepped back from its  quantitative easing and appears now set on a  bond-buying program.

The European Central Bank has reduced its rate of bond purchases, sen as an attempt to reduce the divergence effect ahead of further U.S. rate hikes in an effort to keep the gap under control. The ECB will likely fail.

That said, each central bank also had other reasons for its strategy shift, from the dwindling supply of bonds available for purchase by the Japanese bank to the overall improvement in global economic circumstances and increasing signs of general inflation as commodity prices have stabilized.

In fact, the improving global economic climate has allowed the market to largely ride out developments that at the beginning of 2016 seemed to be filling it with panic. Last December’s U.S. rate hike made China’s yuan look overvalued, especially following the move in 2015 by the People’s Bank of China to break its currency’s dollar peg. The resulting rapid increase in capital outflows prompted the Chinese central bank to spend $100 billion a month in foreign exchange reserves to staunch the bleeding. With under $3 trillion left in China’s reserves and with $2.4 trillion ‘ringfenced’ to underwrite  China’s $16 trillion in loans, the Chinese economy is fast running out of financial defences. Especially so with the prospects of strategic instability in the South China Sea, complicating China’s economic options.

In the wake of Italy’s failed constitutional referendum, and with debt repayment scheduling again approaching, with the banks still vulnerable to instability, the economic situation in Southern Europe is fraught. Populist political elections are due across the EU over the next 18 months, adding to the sense of approaching political and fiscal crisis once more. The shock of Brexit could be followed by more ‘falling dominoes’ as the EU looks vulnerable, at a time when the German economic powerhouse looks weak and divided.

With Italy’s banks now at an extremely fragile point, and with China’s $3 trillion in reserves (effectively only $0.6 trillion available) now 25 percent lower than they were in 2014, countries around the world are hoping that another financial storm will not descend. If it does the US will weather the financial maelstrom better than most.