Italy: Banks in trouble

Written by Borislav Boev; Originally appeared at Lentata.com; Translated by author for SouthFront

At the end of June 2017 the Italian government decided to save two failed regional banks with a rescue package of 5,2 bln. euros. The assets of the problematic “Banca Popolare di Vicenza” and “Veneto Banca” were taken by “Intesa Sanpaolo”, which is in stable condition. The whole ‘bailout’ however, might cost the Italian taxpayers as high as 17 bln. euros.

The recapitalization of these two banks means that the Italian taxpayers will have to pay the bill, which poses a potential risk not only for the economic climate, but also the political stability in the country. In this particular case, the government support for troubled banks directly contradicts the new European Banking directive for restructuring troubled banks. These new rules are aimed to protect the ordinary taxpayer from paying for bankers’ mistakes – something that has repeatedly happened during past recessions. The European Union itself somewhat violated its own rules after allowing the Italian government to ‘seal off’ the financial hole, opened by “Banca Popolare di Vicenza” and “Veneto Banca”.

The European Union wanted to show that they had learned the lesson from the Great recession, so they decided to rewrite the rules on which the governments are dealing with troubled, problematic banks. Under these new rules, the risk has to be distributed horizontally, instead of the traditional vertical ways. Spreading the risk horizontally essentially means that the cost of the failing banks must be paid by the shareholders and the bondholders, aiming to protect the ordinary citizens who have put their money in the banks. The so called bail-in where the bank saves itself instead of the well-known bail-out, where the government intervenes with a big rescue package at the expense of billions.

However, the case with these two Italian banks didn’t take the bail-in direction. Many of the smaller investors will be saved. And this means Italian taxpayer will have to fill the gap. The government however, has decided not to close the banks in order to avoid unnecessary panic in the already troubled economic climate. But the acquisition of the good assets from “Intesa Sanpaolo” comes with a price: 600 bank offices will be closed and 3,900 employees will be laid off.

Italy’s banking problems are no longer Italian. The country’s economy is 3rd biggest economy in the Eurozone, following Germany and France. Earlier this year, the Italian parliament approved a 20-billion-euro rescue package, aimed at saving failing banks such as “Monte Del Piachi”

The most worried about what’s happening in the Italian financial system is Germany. Berlin’s worries are reasonable: in case of deepening the crisis, combined with slow

recovery of the Italian economy, Germany would have to intervene again. Moreover, the shaky financial situation in Italy is a serious blow to the idea of creating a stable, united and working banking union within the Eurozone.

If Italy fails to stabilize its financial system and get the economy back on its feet, Germany might have to intervene again with rescue packages – a scenario, similar to the Greek one. The German government will try to avoid this. We shouldn’t forget that Italy and Greece are leaders in the Eurozone for most troubled countries in terms of public debt. In 2016, the debt-to-GDP ratio of Italy reached 132%. Moreover, the Italian economy is not recovering from the Great recession as fast as Rome wants. The post-crisis years saw a negative GDP growth of -3%. In 2014, 6 years after the crisis, the Italian economy showed some signs of recovery, but the growth rates are still too sluggish – they hardly reach one percent per year. Slow recovery is one of the reasons why small business still have difficulty in paying their credits.

The consequences of the banking instability in Italy are yet to manifest. Bad credits are of considerable size as they reached 325 billion euros. The accumulation of such great negatives in the banking system suggests that for many years the banks led a policy of unreasonable crediting, combined with bad management and even worse risk management. When these facts combine with the slow rates of economic recovery and political instability, the prognosis is not that good. Despite the facts, things are not that bad either. At least not in the short-term. The markets did not shake after last month’s decision to recapitalize the banks. Their optimism can be contributed to the fact that with this move, the Italian government has taken out the risky banks from the picture. But market’s flat response doesn’t mean that the crisis is resolved. The difficult decisions are yet to come, and they are directly related to the political situation not only in the country, but also in the European Union.

Italy’s banking problems are becoming a major obstacle to the overall concept of creating a single banking union within the Eurozone. What’s happening in the country raises doubts about whether the new banking rules, imposed by EU, will work at all. European leaders need to realize that there is a huge difference between desire and reality, especially in the manner of “integration at any price” policy.