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.

Relatively massive deposit outflows from Popolare di Vicenza in March 2017 appears to have spooked investors not only in small banks like Popolare di Vicenza, but also in large Italian banking institutions. Investors across the banking sector fled fearing losing their money in what is known as ‘a bail in’ before the Italian government would counternance a traditional bail out, to repair the 360 billion euro non-proforming bad loan debt mountain. A ‘bail in’ would require current bank depositors making additional mandatory deposits to part cover bad loans, before the Central Bank would bail out the affected banks.

Italian banks faced a similar crisis in the past but the requirement for a mandatory ‘bail in’ was forestalled under provisions and further controls by the Central Bank on Italy’s Monte dei Paschi, Italy’s fourth largest bank, that was allowed to receive state aid without its investors being ‘bailed in’. Humorously called a “precautionary recapitalisation’ in the macabre language of European Union banking. Now the threat of a forced ‘bail in’ has come back with a vengeance to Italy just as Italy begins to think about National elections again. The deal, which is still being worked out, was based on a banking technicality, related to a so called stress test carried out on Monte Dei Paschi bank last summer, to which Italy’s banks across the industry may now be subject.

Italy currently has one of the highest debt levels in the European Union, and it with an election due within the next year,  a Euroskeptic government electoral win is now a possibility. Such an election led by the Northern League could spark calls for a ITEXIT along the lines of the British BREXIT. Italy is not in good shape to weather aother banking crisis, but it may be forced to deal with one nonetheless — and that won’t be good news for an already divided Europe contemplating further defections from the EU experiment.