A COLLISION between Italy and the European Union over a bailout of Italy’s collapsed banking system is getting closer by the day. It is threatening not just the EU banks but the union itself, and the world, seeing that Italy is the EU’s third economic power. Also, an EU banking collapse will set off a much deeper crisis than the 2008 crash that began with the US sub-prime mortgage crisis.
Italy has about $540 billion of non-performing loans and a desperate need for new capital. The Italian Prime Minister Matteo Renzi wanted to inject the equivalent of about $60bn of public funding into the system to try to stabilise it. However, the rules of the European Banking Union forbids taxpayer bailouts and insists that shareholders and creditors are ‘bailed in’, that is ruined before taxpayers can be called on.
Renzi tried to take advantage of the instability within Europe generated by the Brexit vote to convince the EU authorities to suspend the prohibitions on state aid and the bail-in rules, threatening to act in defiance of them if Italy wasn’t given approval to ignore them.
Now Renzi is gone, after losing his referendum and Italy has a government in name alone and is heading for a crisis general election. The combination of this economic and political crisis and the way that it is interpenetrating and transforming each other will definitely produce a new quality, a catastrophe for Italy’s bosses, and a revolution that will blow the EU into pieces.
Italy’s largest bank Unicredit is preparing to unveil a 13bn euros (£10.9bn) rights issue this week. Last weekend, the rudderless Italian government was seeking to nationalise or part-nationalise Monte dei Paschi, Italy’s third largest lender, after hopes of raising 5bn euros from private investors faded, and the European Central Bank refused to give it more time.
The PM-light Italian government is desperate to avoid nationalising Monte dei Paschi because it means imposing its big losses on creditors – a ‘bail-in’ that would have catastrophic political consequences. Of the banks deemed vital to the financial system, Unicredit came bottom of the EU’s summer stress tests!
Monte dei Paschi had sought a three-week extension until 20th January to seal a private sector 5bn euro rescue plan. Monte dei Paschi is one of several big Italian banks struggling with bad loans that will never be repaid.
Italy was one of the economic miracles of the 1960s and 1970s. The northern part of Italy was a production powerhouse. Italy is now the eighth-largest economy in the world and has issued the third-largest amount of sovereign bonds.
That mountain of sovereign bond debt is really the revolutionary avalanche-in-waiting that an Italian banking crisis is about to send crashing down on the rest of the world, since a large percentage of those bonds are outside of Italy – sitting on the books of banks and central banks.
On an aggregated basis, the Italian banking system has less than 50% of the capital it would require to cover the bad debts. Estimates are that Italian banks may need 40 billion euros just to remain solvent.
Italy alongside Greece, Spain, and Portugal borrowed to buy goods mainly from Germany. However, the economic growth anticipated failed to occur. The purchased goods have mostly been consumed, so there is no collateral to recover. Many loans are total losses.
The US banks would have to have non-performing loans of $3.8 trillion to be as badly off as the southern EU states. That total dwarfs any problems from the 2008 sub-prime crisis. There is roughly 240 billion euros of this type of bank debt scattered around Italy.
Customers of the Italian banks will be the first to lose all of their investment when their bank hits the wall. Despite all of this, the very weak Italian government is left with little option but to attempt to embark on a ‘precautionary recapitalisation’ to impose the losses on retail investors who hold 2.1bn euros of the bank’s bonds.
There will be an angry reaction to this theft, and it will bring down the government. The only way out of the crisis for the workers of Italy is through organising a socialist revolution that will bring down the EU and prepare the way for the Socialist United States of Europe.