Italy Is The New Greece

Source: What Is That Whistling Sound

Source: Trading Economics

Note that Italy is the 8th largest economy in the world (approx 9 times the size of that of Greece ($0.195 trillion)) $1.86 trillion.

Italy’s banks might need 52 billion Euro bailout

There are €360 billion in impaired loans in the Italian banking system, compared to €225 billion in equity on their books. Obviously this is a problem. The FT summed it up nicely in a report last week.

“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. 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.”

World’s Oldest Bank Teeters On The Edge

The European Central Bank has rejected a request by Monte dei Paschi di Siena for more time to raise capital, a source has said, in a move that piles pressure on the Italian government to step in and rescue the ailing lender.

Italy had wanted more time to wrap up a €5 billion rescue plan that was thrown into doubt by the Prime Minister’s defeat in a referendum at the weekend.
The ECB’s supervisory board turned down the request at a meeting today on the grounds that a delay would be of little use and that it was time for Rome to step in, the source said.

The Italian government is expected to intervene to recapitalise the bank to avert the risk of it being wound down.
The failure of Monte dei Paschi could threaten the savings of thousands of retail investors, ripple across the wider banking sector and provoke a financial crisis in the euro zone’s third-biggest economy.

Italy faces the risk of early elections, and the prospect of an anti-euro party coming to power, after Prime Minister Matteo Renzi quit this week following the heavy defeat of his plan to reform the constitution in a weekend referendum.

My view: 

Despite bail-in legislation, that which allows ordinary depositors to be wiped out in a bank failure event, it appears that Italy may also use taxpayer funds to prop up its ailing system.

It is becoming increasingly obvious to this thinker, that the financial crisis that began in 2007 is far from over.  The banking system has not been reformed in an effective manner.  Banks continue to privatize profits and are again attempting to socialize losses.

The coming crisis, which we now anticipate may arrive in the next 12 to 24 months, will be a bond market crisis.  As government bond yields rise, interest payments on the debt rise putting strain on government budgets.  Combine more bank bailouts in this mix and we can expect bond buyers to demand more yield compounding the problem further.

For those unaware, the bond market is about twice the size of the stock market globally.  If this crisis gathers momentum as we anticipate, it could well be one double the size of the great financial crisis of 2008.