Jacob Shapiro for Geopolitical Futures :
(From previous issue)
For its part, the European Union has been ineffective thus far in helping Italy attack its NPL problem. Analysts at Mediobanca, an Italian investment bank, criticized the ECB, saying that it had already been collecting data for 18 months and that requests for even more information could produce uncertainty in an already fragile market. And because Italy is a member of the eurozone, it cannot simply print more euros and devalue its currency, as other countries might do in similar situations.
In addition, the European Commission in October rejected an Italian plan to create a single “bad bank” that would have taken away all of the debts held by Italian banks. The twin goals in this plan would have been to encourage investment into Italy’s banks while creating a more efficient vehicle, backed by state guarantees, for selling the bad debt on the market. Italy has since proposed a new plan to the European Commission, and last week Italian Minister of Economy and Finance Pier Carlo Padoan said he hoped it would be approved soon.
The new plan proposes to give Italian banks the chance to buy public guarantees, enabling them to offload their non-performing loans onto some kind of asset management company. The details are vague and the prospects for success unknown. Even if the European Commission approves Italy’s new proposal to tackle its NPL problem, the creation of any kind of vehicle to absorb the huge amount of assets that 17% NPL rates entail would affect the whole system’s ability to lend.
Both of these Italian plans are attempts to shift the risk from the banks to the Italian government – which is precisely what new EU regulations try to prevent. The EU wants Italian debt holders and depositors to be the first line of defense, not public funds. There is also the question of whether the Italian government could absorb the risk of all these loans failing. The latest estimates from the Bank of Italy (released last week) put the total value of NPLs in the country at €200 billion. According to Eurostat, Italy’s debt-to-GDP ratio is more than 132%, second in the eurozone only to Greece. The Italian budget passed in December is around €32 billion and is projected to run a deficit of 2.4% of GDP.
These realities are bringing Italy in direct conflict with the EU, specifically with Germany. The deficit projections for Italy’s 2016 budget exceeded the previous target of 1.8%, and the EU is planning to review Italy’s budget targets at some point in the next six months. Brussels is trying to impose strict financial targets on Italy. This is in many respects the German way. The same Germany that demanded Greece swallow difficult austerity measures last summer is displeased with an Italian budget that is simultaneously exceeding deficit targets and cutting taxes.
Both sides have reasonable demands. Italy wants the EU to support it in a particularly challenging time. Germany does not want to be held responsible for what it sees as another country’s profligate lending. Italy and Germany are finding their interests diverging, as Germany demands Italy rein in spending and opposes the creation of an EU-wide bank deposit insurance scheme and both countries argue about appropriate next steps for Europe’s migration crisis.
This makes Italy’s banking woes not just an Italian problem, but a political problem for the EU, and in particular for Germany, neither of which can afford to see Italy’s banking system collapse.
The core problem is NPLs, and Italy has no solution yet. At least 17% of Italian loans are non-performing, and some estimates are as high as 21%. The ECB says that it randomly chose some Italian banks from which it wanted more information, but one of them, UniCredit, has had to cut jobs and propose asset sales to boost its stability in the eyes of financial regulators, and another, Monte dei Paschi, holds 22% NPLs and has watched its shares nosedive over 46% so far in 2016. So it may have chosen randomly but the assertion rings hollow.
In our 2016 forecast, we noted Italy’s banking problems would be quite serious in 2016, and that the degree of severity would depend on how quickly and effectively the rest of Europe could develop creative solutions. The current developments do not bode well and point to the possibility of repeating the Greece disaster on a much larger scale.
(Jacob Shapiro is the Director of Analysis for Geopolitical Futures, a global analysis company founded and led by George Friedman, an American political scientist, author, and businessman).
(Concluded)
