Europe on the Brink

While it may appear that Quitaly has been avoided with the the Bail In “rescue” of Monte dei Paschi, its third largest bank, all they have really accomplished is to spread the weakness among other fictionally solvent banks and saddle depositors with paper of questionable redeemability.

Another “victory” like this and we are undone.

Italian Bank Failures Could Disintegrate the EU

TRNN: After the 2012 banking crisis, the European Union passed rules that require bank shareholders to pay the bailout before EU intervenes. In Italy’s case, the shareholders tend to be small, private households that stand to lose a significant amount of their savings. But did the banks fail or whether they are bailed out by their shareholders, the government of Prime Minister Matteo Renzi stands to lose no matter what happens.

GERALD EPSTEIN: (I)t’s very bad for these banks. And as you said in the intro, that means it’s also very bad for people of Italy, especially the people who lent money to these banks, and the government. The banks–but I’m not sure the stress tests themselves will actually reveal how bad it is. In fact, there’s some evidence that the stress tests themselves might softpedal it, but we can come back to that.

For the banks themselves, as you said, they have somewhere between 20 percent and by some measures 40 percent nonperforming loans. It’s well understood that several of them are essentially bankrupt and need a bailout. But as you also said, the new rules in the European Union prevent governments from bailing them out, unless they first, the creditors first lose their money. Which means in this case some big investors, but also a lot of small Italian investors.

So there’s a standoff. The European Union is insisting on this. But the government says no, we can’t impose these kinds of costs on our people. And we need to bail out the banks.

DIMITRI LASCARIS: The banks in Europe have just been eviscerated by share prices, have been eviscerated this year. Deutsche Bank, which is identified by the IMF as the riskiest big bank, and the largest lender in Europe has seen its stock price fall by something in the range of 50 percent this year. The Italian banking sector has seen its market capitalization decline by over 50 percent this year. The banks in Europe are operating in a very challenging environment because there are ultra-low interest rates which are eating into their lending profit margins.

And the Brexit vote isn’t helping. It’s created additional uncertainty which, by the way, is not going to be examined in these tests. So if you look at what’s actually happening in the European banking sector, the idea that they’re in a steady state is highly dubious. And the absence of a pass or fail grade raises real questions about the legitimacy of these tests. And you know, to sort of add fuel to the fire, these three academics have now, the ones I mentioned previously, have come out with a new study in which they estimate–and what they do in this study is that they look at something that the EBA has not been looking at. They ask, what’s going to happen? What will the capital requirements be if there is a 40 percent drop in global stock markets in six months?

And that’s, something in that magnitude happened just a few years ago in 2008-2009. So this is not an implausible scenario. And they conclude that the banks, the 51 banks that are being examined, would need a capital nexus of 900 billion euros, and that even if the bailing mechanism were employed, certain of these banks would still require government support. So it will be very interesting to see what these results show tonight. I suspect that the number we’re going to be given is going to be nowhere near 900 billion euros.

Even the Germans are starting to get it.

Did Germany Just Blink?
by Don Quijones, Naked Capitalism
July 31, 2016

A most unusual thing happened in Europe this week. In a rare climb down, Angela Merkel’s government decided not to push the European Commission to impose a punitive fine on Portugal and Spain for their persistent failure to comply with their budget deficit targets, leading one Eurogroup minister to declare that the euro zone’s Stability Pact is “dead.”

Of Europe’s 27 commissioners, only four voted in favor of applying the fines; the other 23 voted against. According to El País, the deciding factor in the decision was an impromptu phone call from German finance minister Wolfgang Schäuble to some of the more conservative commissioners, giving them the green light to forego the fine.

The U-turn offers Spanish and Portuguese taxpayers a brief but welcome respite from Troika-enforced fauxterity. As we previously pointed out, if the Commission had imposed the fine, it would not have been paid by the politicians who failed to play by the rules agreed upon in Brussels; it would have been paid by the citizenry who are already suffering the consequences of the recession that helped cause the deficits.

(Italian financial journalist Paolo) Barnard rounded off his rant with a rallying call for Italians to follow the UK’s example and demand an exit from the EU — a prospect that should be taken very seriously given that one of the manifesto pledges of Italy’s rising opposition party, the 5-Star Movement, is to call a referendum on Italy’s membership of the euro.

Such a vote would be impossible since the Italian constitution expressly forbids referendums on international treaties such as those that hold the EU together. But as Reuters reports, Matteo Salvini, the leader of the right-wing Northern League, a member of the opposition center-right, and Beppe Grillo, founder of the 5-Star Movement, have vowed to pursue a legislative change to allow an ad-hoc exception to the Italian constitution.

Whether or not a referendum on the euro takes place, one thing that’s clear is that a post-Renzi Italy will be a much more difficult, unpredictable force to deal with than the current Renzi-governed Italy. And if Italy ever did decide to leave the Union, whether in an orderly or disorderly fashion, it would be the end of the road for the European project.

For that reason alone, the Commission and Germany will almost certainly end up granting further concessions to Italy and its Southern European neighbors, including a taxpayer-funded rescue of MPS. It may even include a bail-out top-up for Portugal’s crumbling financial system, which was left out of last week’s stress tests.

The challenge for Merkel and other leaders of core euro zone nations will be trying to persuade their already disgruntled voters of the need for increased solidarity with their struggling neighbors to the South. That may well be a bridge too far.