Analysts Fear Looming Italian Bank Failure

The new 50 EURO banknote is presented at the European Central Bank, ECB in Frankfurt/Main, Germany, on July 5, 2016. / AFP / DANIEL ROLAND (Photo credit should read DANIEL ROLAND/AFP/Getty Images)

As if the immigration crisis and ever more strained relationship with Brussels weren’t enough, now Italians have to face the specter of a major bank failure that analysts say could utterly cripple Italy’s financial structure.

Writing for Money Week, financial expert Simon Wilson notes that Italian bank debt has reached a critical point with €360 billion of bad debt, or non-performing loans, “equivalent to a fifth of Italy’s GDP” and about 18% of total bank loans.

Wilson warns that bank collapses in Italy could lead to a major financial crisis throughout the Eurozone, because of the interconnectedness of financial markets especially within the European Union. The risk of contagion is most acute for the French, whose total exposure to Italian debt exceeds €250 billion.

On July 11, Before It’s News reported that bank runs had already begun in parts of Italy, with worried clients emptying automatic tellers of all cash. One of the banks whose financial health has suffered most is the Monte dei Paschi di Siena, the world’s oldest banking establishment, which has been in operation since the year 1472.

In late June, Germany reportedly vetoed Italy’s request for a bail-out of failing Italian Banks, which would require some €44 billion just to stay afloat.

Maurizio Bernardo, the chairman of Italy’s Lower House’s Finance Commission, has said that the government is studying various options to shore up the flagging banking sector, including a significant capital injection.

Dramatic drops in the stocks of Italian banks reflect the growing conviction that Italy’s financial sector is on the verge of collapse, with an astounding 68 percent decline overall since the beginning of 2016.

The stock sell-off has picked up speed since the Brexit vote, which impelled investors to reconsider the risks facing European assets.

Italy is still in the throes of an ongoing economic slump that has exposed banks to numerous bad debts from failing businesses. Last week the International Monetary Fund (IMF) suggested that Italy’s economy would be unable to return to its pre-crisis size until the mid-2020s, meaning “nearly two lost decades.”

The IMF further noted that Italy’s high taxes, combined with an “inefficient public sector” and civil service wage hikes had all contributed to one of the lowest productivity growth rates among advanced economies over the last 30 years.

Since early 2016, reformed Eurozone laws have severely restricted what governments may do to help struggling banks, meaning that authorities are prohibited from using public money to recapitalize banks without first dipping into the funds of private investors.

In the case of Italy, a crisis bail-out would wipe out not only shareholders, but also ordinary depositors who have been sold €173 billion worth of questionable bank debt.

This autumn, Prime Minister Matteo Renzi’s government faces an important referendum on constitutional reform, which, will act as a de-facto confidence vote in Italy’s membership in the EU.

A thumbs-up for the referendum is anything but certain, particularly with the growing popularity of the populist Five Star Movement that registered significant victories in recent mayoral elections throughout the country.

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