Italians Vote “No,” Renzi to Resign, Banking Crisis Now Looking for Taxpayers
By Wolf Richter, Naked Capitalism
December 5, 2016

While the UK voted to exit the European Union, Italy might try to exit the Eurozone. This will be tough to do, and it will have daunting implications. Alone a serious discussion of this topic at the national level will spread uncertainty and fears of financial mayhem.

But until that election, a caretaker government would have to deal with the white-hot banking crisis, and some banks might collapse entirely.

The already beleaguered euro reacted immediately, dropping 1.17% to $1.0505, the lowest since the low of March 2015, which had been $1.0457. If it slips below that March 2015 low, it will mark the lowest level since 2003. It currently trades down about 1% at $1.056.

The largest 14 Italian banks – not counting the myriad of smaller banks – are sitting on €286 billion of “non-performing exposure,” as the ECB calls it. These loans, debt securities, and off-balance sheet items won’t be repaid. Banks still carry this toxic waste as assets on their books, and writing off this toxic waste and cleaning up their books would crush the banks’ capital officially – though in reality, it got crushed long ago – and take down the banks.

So banks have to find new capital to clean up the horrendous mess, but new capital has become scarce, given the horrendous mess.

The most urgent case is Italy’s third largest bank, Monte dei Paschi. It has already raised new capital twice in recent years, only to re-collapse. The third time is not going to be the charm, investors have decided. They’ve lost their appetite for losing even more money on this morass.

But the already complex – and ultimately very costly – task of dealing with Italy’s zombie banks, after years of brushing toxic waste under the rug, has become vastly more complex in the absence of a government with a mandate. Instability and uncertainty are likely to ricochet from Italy’s banking crisis to the Eurozone and its teetering banks, and beyond.

So, just to make this clear, the Euro is now trading at $1.05 and there is over 50% likelihood according to Bloomberg that it will reach parity with the dollar within months with some analysts, including Deutsche Bank, predicting it will fall as low as .80 to .95. What does that mean? Well, in the short run it means European goods will become cheaper relative to the U.S. (good time to take a vacation) and that the U.S. Trade Deficit will rise.

Is that a negative economic outcome for the U.S.? Maybe, some economists claim there are limits to how large a deficit you can run though none of their dire predictions of hyper-inflation have proven true so far, the more immediate effect is it makes U.S. Labor inputs less price competitive and there will be job loss (that, unfortunately, has plenty of evidence to back it up).

The Fix Is Already In, as Italy’s Moment of Truth Beckons
by Don Quijones, Wolf Street
December 3, 2016

Europe is sick and tired of national referendums, in the opinion of Jean Claude Juncker, the president of the European Commission. Over the past week, Juncker has urged EU leaders not to hold more referendums as he fears that other European electorates may take a leaf out of the UK’s book and vote to leave.

It’s not hard to understand Juncker’s distaste for referenda: the EU has been on the losing end of just about every popular vote of this fledgling century. Whenever people in Europe have been given the rare opportunity to vote on Brussels-related business, they invariably vote against Brussels. In fact, the only vote the EU has won this century was in Ireland in 2009, and that was only after the people had first voted against the Treaty of Lisbon. It was the wrong answer and voters were politely invited to reconsider. Or else.

It is the banking crisis that has Brussels most worried. As Italy’s finance minister Pier Carlo Padoan admitted on Thursday, if the vote goes against Renzi, the resultant political uncertainty would make it even more difficult to raise capital, putting at risk as many as eight mid-sized financial institutions, all of which are already at or beyond the brink of solvency.

They include Monte dei Paschi di Siena, home to an estimated 35% of Italy’s €360 billion of non-performing loans. The bank, whose shares are now worth less than €0.20, has failed spectacularly to come up with a convincing plan to steady its finances, despite all the creative assistance it’s received from Wall Street’s biggest bank, JP Morgan Chase, and Italy’s most influential investment bank Mediobanca.

MPS has managed to persuade bondholders to swap their holdings for shares, at roughly 20 cents on the euro. But the second part of the rescue plan involves issuing new shares worth almost 10 times its current market cap. An ‘anchor investor’ (such as Qatar’s sovereign wealth fund) taking a large bloc would be the ideal solution, since most smaller investors have already been burnt in two previous capital expansions.

But even big-time investors with more money than sense, or hoping to call in big favors at a later stage, will be hard to find if the referendum leaves the country without a government. In such an event, a caretaker government would have little choice but to carry out a highly sensitive ‘bail-in’ of junior bondholders, including many small-scale retail investors who were criminally “missold” complex financial instruments during the liquidity-starved days of Italy’s sovereign debt crisis. In the worst case scenario, a bail-in of MPS could become the catalyst of a system-wide bank run.

To avoid that outcome, every effort will be made to keep MPS from crumbling under the weight of its own toxic debt load, even if that means bending or breaking the rules of Europe’s sacred bail-in legislation before they’ve been put into use. As Italian daily Corriere della Sera reported on Friday, Italy is in last-gasp negotiations with the European Commission over the terms of a state bailout of MPS. The taxpayer funded-rescue has already been requested and could be launched as early as next week, “if needed” (ha!).

In other words, the fix is already in. Every effort will now be made not only to steady the ship and dampen fears of financial contagion but also to use the political crisis as cover for channeling vast sums of overt and covert taxpayer-funded assistance to a financial sector that cannot be allowed — at any cost — to suffer the consequences of its own chronic mismanagement, or worse.

The solution? As it always is for the Neoliberal elites- less democracy.

Italy Just Handed the Global Economy Another Giant Variable
By PETER S. GOODMAN, The New York Times
DEC. 5, 2016

Italy’s banks are stuffed with uncollectable debts in part because the country’s economy is smaller than it was a decade ago. Bad loans on bank balance sheets reflect that millions of people have lost jobs, eliminating spending power, while companies have seen sales evaporate.

Read- Austerity doesn’t work.

Mr. Renzi pursued reforms aimed at spurring companies to invest. He made it easier for companies to terminate low-performing workers to eliminate a chief impediment to hiring them in the first place — the fear that giving someone a job was akin to adopting them as a dependent forever.

Read- lower wages and less job security.

He sought to speed civil processes in the notoriously inefficient court system to make it easier for banks to recoup bad debts by collecting collateral.

Read- foreclosures.

The constitutional changes he sought were aimed at clearing another blockage to reform. They would have trimmed the powers of the upper chamber of the legislature, a place where proposals die.

Read- less democracy.

Voters clearly did not trust Mr. Renzi to wield greater power. Now, they will be represented by someone with less power where it matters a great deal: Brussels and Berlin.

Tell me again why they should sacrifice their rights to faceless Neoliberal autocrats?

Debt-saturated nations in Europe have long argued that their burdens would be lighter if they could spend more money to spur faster economic growth.

But the European Union — anchored by Germany — has cited rules limiting the spending of member governments with big debts. Instead, Brussels and Berlin argue, such countries must deliver so-called structural reforms, stripping away labor protections and trimming pension benefits.

In a testament to the severity of this creed, German Finance Minister Wolfgang Schäuble effectively threatened to banish Greece from the euro if Athens did not deliver on reforms it promised as a condition of successive European bailouts.

Austerity doesn’t work. That was true in the 30s and it’s just as true today. As long as Austerity is the policy of the European Union, Italy and the rest of the members are better off out of the Euro and out of the Union. Voters are not stupid.

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