The Italian Banking Crisis

Europe is the new buzzword for describing every kind of crisis a region could possibly face: be it the humanitarian refugee crisis, sovereign debt crisis of Greece, an impending Brexit, a rumoured Scottish referendum, the possibility of Northern Ireland joining Republic of Ireland, the terror attacks in France and the failed coup of Turkey. This post will focus on the latest to join the league: The Italian Banking crisis.

The article http://www.vox.com/2016/7/8/12119242/brexit-italy-eu-crisis, explains that the Italian problem is centred around the issue of bad debts (something that India can very clearly relate to). Italian banks have about $400bn in bad debt. The Italian PM Matteo Renzi is trying to negotiate with EU leaders to allow the use of $45bn from taxpayer’s funds to prop up the banks which have bad debts on their balance sheets. This is against the EU norms, according to which the bank’s investors must pay the price first, before using the taxpayer’s funds. These include creditors who have invested in bank’s bonds. The author draws a comparison to America’s TARP bailouts (Troubled Assets Relief Program) of 2008 which exactly followed this route: using taxpayer’s money to directly bailout the banks. He interestingly points out that 45% of the banks’ debt is owned by ordinary Italian citizens. If EU rules were to be followed and investors bore the brunt, it would jolt their savings. In order to approximate the extent of damage these bad debts can cause, the article by Bloomberg http://www.bloomberg.com/view/articles/2016-07-05/the-eu-s-inflexible-bank-rules-risk-an-italian-brexit states that non-performing loans constitute 20% of Italian GDP.

In the article by Telegraph, http://www.telegraph.co.uk/business/2016/07/16/why-italys-banking-crisis-will-shake-the-eurozone-to-its-core/, it is stated that as per current projections, Italy will not return to its pre-crisis size before 2025 – which implies 2 ‘lost decades’! A major part of the article describes how Italy has been deferring the crisis, in an attempt to protect the investors/households by hoping to strike a better deal with EU leaders. EU remains adamant on the grounds that it cannot bend the financial reform rules for Italy, as it would have to do the same for Portugal as well. Another reason given by EU is that the investors should have made an informed decision while choosing the banks. This would be a lesson for them and keep them wary in future (if they have one at all!). The article also features 3 line graphs for Italy, Germany, France and Spain for the years following the financial crisis.

The issue has a political angle attached to it with Mr. Renzi’s actions having implications for Italy’s upcoming referendum vote regarding a constitutional reform to reduce the number of senators and curb the Upper Chamber’s powers in bringing down the government. This is a story of yet another PM, proposing just another referendum, confidently putting his post at stake if the referendum results fails to favour his party. Déjà vu much?

*This was originally posted on FISCUL, Lady Shri Ram college facebook page. These posts use a different format by supplementing them with links which have been used for the research and are hence kept short and crisp.

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