It remains up in the air whether the new 150 billion euro liquidity fund will help to stabilize the Italian banking sector... Grab your popcorn, folks, this should be one hell of a summer.
Oil is crashing back down, precious metals are continuing their climb (although not for lack of manipulation), US treasury yields are hitting record lows and stocks are failing to break previous highs as the Brexit fallout continues to settle on the markets. But for the moment all eyes are turned to Italy, where the next shoe may be about to drop.
Specifically, the shoe is dropping in the Italian banking sector, where bad loans are the nemesis of the day. As the Wall Street Journal reports:
“In Italy, 17% of banks’ loans are sour. That is nearly 10 times the level in the U.S., where, even at the worst of the 2008-09 financial crisis, it was only 5%. Among publicly traded banks in the eurozone, Italian lenders account for nearly half of total bad loans.”
The WSJ blames this on the “lax lending standards” of Italian banks before quoting Lorenzo Codogno, the former director general at the Italian Treasury: “Brexit could lead to a full-blown banking crisis in Italy. The risk of a eurozone meltdown is clearly there if Brexit concerns are not immediately addressed.”
This looming crisis prompted talk of a European bailout for Italy's ailing banks, but that talk was promptly shot down by German Chancellor Angela Merkel, who insists the bloc must follow the anti-bailout provisions put in place by the EU in 2014. The rules require banks to bail-in key stakeholders (including shareholders, bondholders and some depositors) before receiving government assistance.
But that decision was reversed over the weekend when the European Commission suddenly granted Italy the power to go ahead with a special 150 billion euro “government liquidity” (i.e. bailout) fund under a provision allowing for “extraordinary crisis rules.” Interestingly, Italian Prime Minister Matteo Renzi is now hitting out at ECB chief Mario Draghi, who was Director General of the Italian treasury in the late 1990s and head of the Bank of Italy from 2005 to 2011.
So we have Merkel being a stickler for the rules to stick it to another one of the so-called “PIIGS” countries who isn't living up to German standards and the Italians hitting back at the head of the ECB. It remains up in the air whether the new 150 billion euro liquidity fund will help to stabilize the Italian banking sector, but one thing is already certain: European tensions are rising, claws are coming out, and the post-Brexit infighting has only just begun.
Grab your popcorn, folks, this should be one hell of a summer.