Thread Rating:
  • 1 Vote(s) - 5 Average
  • 1
  • 2
  • 3
  • 4
  • 5
Generational Dynamics World View
*** 5-Jul-16 World View -- Italy bank crisis more dangerous to EU than Brexit

This morning's key headlines from GenerationalDynamics.com
  • Italy bank crisis more dangerous to EU than Brexit
  • EU Banking Union rules were a reaction to Greece's financial crisis

****
**** Italy bank crisis more dangerous to EU than Brexit
****


[Image: g160704b.jpg]
The Banco Monte dei Paschi di Siena (MPS), established 1472, the world's oldest operating bank, will face a crisis on July 29

Italy's prime minister Matteo Renzi is considering "unilateral action"
to bail out Italian banks with taxpayer money, in violation of EU
rules. Action is needed because Italy's already fragile banking
system has a staggering $420 billion of bad loans on its books.
Italy's bank crisis and confrontation with the EU has gotten so deep
that some analysts that it threatens the European Union "worse than
Brexit."

Italy's largest bank is Banco Monte dei Paschi di Siena (MPS), founded
in 1472, and the world's oldest operating bank. Its share of bad
loans comes to $55.2 billion. There may be a major crisis on July 29,
when the ECB announces the results of the latest rounds of bank
"stress tests." It's believed that these stress tests will force
major recapitalizations on MSP and other Italian banks.

MPS's stock price has fallen 80% in the last year, and fell 14% on
Monday, following reports that the European Central Bank is going to
issue an "ultimatum" to reduce its bad loans portfolio to $32.2
billion by 2018.

How is MPS going to reduce its bad loans? MPS could call the loans
in, forcing the borrowers to pay or declare bankruptcy, and MPS
estimates that it would only recoup 39% of the face value of the
loans. Or, MPS could sell the bad loans to a third party, in which
case it would only get 20% of the face value. This would reduce the
bad loan portfolio, but it would also require a bank bailout of MPS,
and that's where the confrontation is emerging.

The bailout issue became explosive last year, when Italy arranged for
the bailout of four small regional banks (Banca delle Marche, Banca
Popolare dell'Etruria e del Lazio, Cassa di Risparmio di Ferrara and
Cassa di Risparmio della Provincia di Chieti) which received a $3.8
billion bailout, following strict EU Banking Union rules.

Under the terms of the bailout, ordinary savings deposits were spared,
but people who had purchased bonds and shares issued by the bank would
be wiped out. Some 130,000 shareholders and junior bond holders lost
money in the rescue.

A 68-year-old pensioner, Luigino D'Angelo, hanged himself, after
learning that his $120,000 savings were wiped out by the bank bailout.
The problem is that he didn't have an ordinary savings account.
Instead, he had put his money into the bank's high-risk subordinated
bonds, probably because some over-eager bank salesman told him that
they were high-return, and perfectly safe. He left a suicide note for
his wife of 51 years, saying that he felt humiliated and swindled by
his the bank, the Banca Etruria.

Because of this highly publicized suicide, which many in the public
blame on strict application of EU Banking Union rules, Italy's prime
minister Matteo Renzi is considering "unilateral action" to bail out
Italian banks with taxpayer money. In this case, the bailout would be
paid for by the taxpayer, rather than by bond and share holders.
Retail investors hold roughly a third of total outstanding Italian
bank debt, and forcing them to lose their savings could disrupt
financial stability and undermine depositors' confidence, and even
threaten bank runs.

This pending crisis comes in the midst of plans for Italy to hold a a
constitutional referendum on political reform in October. Renzi has
said that he will step down if the referendum vote fails. This has
added to Italy's political instability, and Citibank has described the
vote as, "probably the single biggest risk on the European political
landscape this year outside the UK [Brexit]." Deutsche Welle and Fitch Ratings and International Business Times (10-Dec-2015)

****
**** EU Banking Union rules were a reaction to Greece's financial crisis
****


The plan by Italy's prime minister Matteo Renzi to bail out Italy's
banks with taxpayer money is a violation of EU Banking Union rules
that were adopted as "lessons learned" from the financial crisis and,
particularly, Greece's financial crisis.

The Banking Union makes the European Central Bank (ECB) the supervisor
of all 6000 banks in the eurozone, applying a single rule book that
applies to all of them. Other EU countries that still use national
currencies have the option of joining.

The purpose of the union is to prevent the following "vicious circle":
  • A country's banking system is in trouble because of a large
    number of bad loans.

  • The national government bails the banks out with taxpayer money,
    either by buying the bad debt (transferring it into a national "bad
    bank"), or else recapitalizing the banks by purchasing bank bonds or
    share.

  • This essentially transfers the banks' bad debts to the national
    government, putting the government into greater debt.

  • Investors are afraid to purchase government bonds, so their values
    go down and their yields (interest rates) go up. In Greece's crisis,
    in December 2011, yields on Greece's two-year bonds actually reached 142.3%.


  • As bond yields rise, the banking system is in even worse trouble,
    requiring a larger government bailout, and so the cycle
    repeats.

The EU's banking union provides three levels of rules:
  • Crisis Prevention: Under ECB supervision, banks are far
    less likely to get into trouble in the first place. This will be
    accomplished in various ways, in particular by requiring banks to pass
    "stress tests" on a regular basis, such as the ones for MSP and other
    Italian banks that will be announced on July 29.

  • Early Intervention. If an institution's situation begins to
    deteriorate (e.g. when a bank is in breach of, or is about to breach,
    regulatory capital requirements), the ECB can force the bank to adopt
    urgent reforms, because the crisis worsens.

  • Crisis Management. If the financial situation of a bank
    deteriorates beyond repair, the ECB can provide a partial bailout from
    a fund to which all EU banks contribute.

In the last case, a "bail-in" process would be used to determine who
is going to lose their money to save the bank. If a bank needs to
resort to bail-in, authorities would first write down all shareholders
and would then follow a pre-determined order in bailing in other
liabilities. Shareholders and other holders of instruments such as
convertible bonds and junior bonds would bear losses first.

Deposits under 100,000 euros would be protected, and taxpayer money
would never be used.

Italy's government followed these rules last year, but 130,000 people
had their savings wiped out, and the suicide of the 68 year old
pensioner whose savings were wiped out has become politically
explosive. These people did not have ordinary savings accounts.
Instead, they were talked into investing in high-risk high-return bank
bonds, and they ended up being wiped out.

The European Union put these banking union rules into place in 2015,
and already they're facing a major confrontation, which may turn into
a major crisis on July 29, when the ECB's stress tests of Italy's
banks will be published. If Italy follows the rules, hundreds of
thousands of additional people will lose their life savings. That's
why prime minister Matteo Renzi has issued his ultimatum that he will
violate EU rules and bail out the banks with taxpayer money. However,
this will only "kick the can down the road," in a familiar process
where one crisis is solved, but a new one emerges a few months later.
Newstalk (Ireland) and Reuters and European Union Banking Union


KEYS: Generational Dynamics, Italy, Matteo Renzi,
Banco Monte dei Paschi di Siena, MPS, Luigino D'Angelo,
European Central Bank, ECB

Permanent web link to this article
Receive daily World View columns by e-mail
Contribute to Generational Dynamics via PayPal

John J. Xenakis
100 Memorial Drive Apt 8-13A
Cambridge, MA 02142
Phone: 617-864-0010
E-mail: john@GenerationalDynamics.com
Web site: http://www.GenerationalDynamics.com
Forum: http://www.gdxforum.com/forum
Subscribe to World View: http://generationaldynamics.com/subscribe
Reply


Messages In This Thread
RE: Generational Dynamics World View - by radind - 05-14-2016, 03:21 PM
RE: Generational Dynamics World View - by radind - 05-23-2016, 10:31 PM
5-Jul-16 World View -- Italy bank crisis more dangerous to EU than Brexit - by John J. Xenakis - 07-04-2016, 09:45 PM
RE: Generational Dynamics World View - by radind - 08-11-2016, 08:59 PM
RE: Generational Dynamics World View - by SomeGuy - 01-18-2017, 09:23 PM
RE: Generational Dynamics World View - by tg63 - 02-04-2017, 10:08 AM
RE: Generational Dynamics World View - by Galen - 03-13-2017, 03:33 PM
RE: Generational Dynamics World View - by SomeGuy - 03-15-2017, 02:56 PM
RE: Generational Dynamics World View - by SomeGuy - 03-15-2017, 03:13 PM
RE: Generational Dynamics World View - by Galen - 05-30-2017, 01:04 AM
RE: Generational Dynamics World View - by Galen - 07-08-2017, 01:34 AM
RE: Generational Dynamics World View - by tg63 - 08-09-2017, 11:07 AM
RE: Generational Dynamics World View - by tg63 - 08-10-2017, 02:38 PM
RE: Generational Dynamics World View - by Galen - 10-25-2017, 03:07 PM
RE: Generational Dynamics World View - by rds - 10-31-2017, 03:35 PM
RE: Generational Dynamics World View - by rds - 10-31-2017, 06:33 PM
RE: Generational Dynamics World View - by noway2 - 11-20-2017, 04:31 PM
RE: Generational Dynamics World View - by Galen - 12-28-2017, 11:00 PM
RE: Generational Dynamics World View - by Galen - 12-31-2017, 11:14 PM
RE: Generational Dynamics World View - by JDG 66 - 06-22-2018, 02:54 PM
RE: Generational Dynamics World View - by JDG 66 - 07-11-2018, 01:42 PM
RE: Generational Dynamics World View - by JDG 66 - 07-11-2018, 01:54 PM
RE: Generational Dynamics World View - by JDG 66 - 07-19-2018, 12:43 PM
RE: Generational Dynamics World View - by JDG 66 - 07-25-2018, 02:18 PM
RE: Generational Dynamics World View - by JDG 66 - 07-11-2018, 01:58 PM
RE: Generational Dynamics World View - by Galen - 08-18-2018, 03:42 AM
RE: Generational Dynamics World View - by Galen - 08-19-2018, 04:39 AM
RE: Generational Dynamics World View - by tg63 - 09-25-2019, 11:12 AM
RE: Generational Dynamics World View - by JDG 66 - 03-09-2020, 02:11 PM
RE: Generational Dynamics World View - by Camz - 03-10-2020, 10:10 AM
RE: Generational Dynamics World View - by tg63 - 03-12-2020, 11:11 AM
RE: Generational Dynamics World View - by JDG 66 - 03-16-2020, 03:21 PM
RE: 58 year rule - by Tim Randal Walker - 04-01-2020, 11:17 AM
RE: 58 year rule - by John J. Xenakis - 04-02-2020, 12:25 PM
RE: Generational Dynamics World View - by Isoko - 05-04-2020, 02:51 PM
RE: Generational Dynamics World View - by tg63 - 01-04-2021, 12:13 PM
RE: Generational Dynamics World View - by CH86 - 01-05-2021, 11:17 PM
RE: Generational Dynamics World View - by mamabug - 01-10-2021, 06:16 PM
RE: Generational Dynamics World View - by mamabug - 01-11-2021, 09:06 PM
RE: Generational Dynamics World View - by mamabug - 01-12-2021, 02:53 AM
RE: Generational Dynamics World View - by mamabug - 01-13-2021, 03:58 PM
RE: Generational Dynamics World View - by mamabug - 01-13-2021, 04:16 PM
RE: Generational Dynamics World View - by mamabug - 01-15-2021, 03:36 PM
RE: Generational Dynamics World View - by galaxy - 08-19-2021, 03:03 AM
RE: Generational Dynamics World View - by galaxy - 08-21-2021, 01:41 PM
RE: Generational Dynamics World View - by galaxy - 02-27-2022, 06:06 PM
RE: Generational Dynamics World View - by galaxy - 02-27-2022, 10:42 PM
RE: Generational Dynamics World View - by galaxy - 02-28-2022, 12:26 AM
RE: Generational Dynamics World View - by galaxy - 02-28-2022, 04:08 PM

Possibly Related Threads...
Thread Author Replies Views Last Post
  Why the social dynamics viewpoint to the Strauss-Howe generational theory is wrong Ldr 5 4,797 06-05-2020, 10:55 PM
Last Post: pbrower2a
  Theory: cyclical generational hormone levels behind the four turnings and archetypes Ldr 2 3,385 03-16-2020, 06:17 AM
Last Post: Ldr
  The Fall of Cities of the Ancient World (42 Years) The Sacred Name of God 42 Letters Mark40 5 4,659 01-08-2020, 08:37 PM
Last Post: Eric the Green
  Generational cycle research Mikebert 15 16,215 02-08-2018, 10:06 AM
Last Post: pbrower2a
Video Styxhexenhammer666 and his view of historical cycles. Kinser79 0 3,322 08-27-2017, 06:31 PM
Last Post: Kinser79

Forum Jump:


Users browsing this thread: 3 Guest(s)