THE FINANCIAL ‘doom loop’ that is tightening around the necks of the Italian banking system will send the Italian banks and the Italian state itself crashing into bankruptcy and will spread like an infection across Europe and the UK, the Bank of England (BoE) warned at the weekend.
Italy is facing a banking crisis of unprecedented magnitude with Italian government debt already over 132% of the country’s GDP (the total wealth created) more than double the limit of 60% insisted upon by the EU.
Italy’s sovereign debt stands at well over two trillion euros, and the new coalition government is putting forward an anti-austerity budget of increased spending on welfare and infrastructure that will push the debt even higher. This sovereign debt has been financed by banks buying up government bonds.
Italian banks have bought these bonds; they hold 20% of Italy’s sovereign debt using money handed to them through bail-outs to stop them going bankrupt as a result of the banking crash in 2008. In addition to the Italian banks, the large banks of France and Germany jumped in to buy Italian government bonds.
Big French banks own tens of billions of Italian sovereign debt with the largest, BNP Paribas, having £8.7bn followed by BPCE with 8.5bn euros and Crédit Agricole 7.6bn euros. German, Dutch and Spanish banks are also up to their necks in Italy’s sovereign debt.
The crisis unfolding, that has got the BoE and its governor Mark Carney so worried, is the ‘doom loop’ – the unstable and ultimately disastrous relationship between the nation state and the banking system. With Italy’s sovereign debt threatening economic collapse at any moment this makes the ‘value’ of government bonds plummet.
With the Italian state in no position to bail them out again, the banks have started to sell their bonds and so depress their value even more, toppling the banks that own the bonds and, in turn, pushing the government into state bankruptcy as it can no longer borrow money to finance the state. This is the ‘doom loop’.
The collapse of the Italian state into bankruptcy in turn will mean that banks across Europe will find their assets are worthless and the entire banking system will face bankruptcy across Europe. But it won’t stop with German or French banks, the repercussions will spread like wildfire across the capitalist financial system as Carney warns.
The BoE report states: ‘Although direct UK banking exposures to Italy are low, if financial strains were to spread across the euro area, there could be a material risk to UK financial stability.’ A banking crisis in Italy, Carney warns, could spark a devastating ‘doom loop’ that would threaten the stability of the UK financial system, so entwined are the banks today.
According to the BoE, the response of the banks would be to pass their crisis on to the working class by increasing their rates on loans and mortgages which, the bank fears, would lead to an increase in loan defaults by individuals and companies that would only increase the number of non-performing loans (un-repayable debt) that they have on their books.
What is clear is that there is no way out of this doom loop for capitalism except to dump the banking collapse on the working class. Already, the working class in Italy have brought this crisis to a head by rejecting the pro-austerity parties that ruled the country for decades as the servants of the European bosses and bankers, and have instead voted in a coalition committed to reversing austerity and defying the dictats of the EU.
Across Europe workers are taking to the streets to demand an end to capitalist austerity while in the UK the working class is determined to break with the bosses and bankers of Europe in defiance of their old leadership. What is clear is that the working class is the only force capable of cutting this capitalist doom loop by putting an end to the anarchy of the capitalist system by taking power through socialist revolution and replacing the bosses’ and bankers’ EU with the United Socialist States of Europe.