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Italy’s Banking System Is In Big Trouble, And Matteo Renzi Is About To Do The Unthinkable


Now that the Brexit vote has come and gone, the EU can begin to focus on what it does best…kicking the austerity, fiscal can down the road.

As the UK is mulling over whether to enact Article 50, and officially kick off the exit process from the sinking ship called the European Union, Italy’s banking system is ready to implode, going from a EUR 40 billion bailout 6 days ago, to EUR 150 emergency support 3 days ago, to a bank bailout, and now talk of further support from pension funds…a formula used so successfully by EU austerity poster child Greece.

And that’s just the beginning of Italy’s financial woes. FT reports that the situation in Italy is so bad that Italian prime minister Matteo Renzi is prepared to defy the EU and unilaterally pump billions of euros into its troubled banking system if it comes under severe systemic distress.

Zerohedge has more on the latest EU headache…

As we noted previously, Brexit will be just the scapegoat used by Renzi and Italy to circumvent any specific eurozone prohibitions. And if it fails, all Renzi has to do is hint at a referendum of his own. Then watch as Merkel scrambles to allow Italy to do whatever it wants, just to avoid the humiliation of a potential “Italeave.”

Matteo Renzi, is ready to intervene with public funds (pension funds to be more precise) if necessary despite warnings from Brussels and, ultimately Berlin, over the need to respect rules that make creditors, rather than taxpayers fund bank rescues. The FT reports

The threat has raised alarm among Europe’s regulators, who fear such a brazen intervention would devastate the credibility of the union’s newly implemented banking rule book during its first real test. In the race to find workable solutions, Margrethe Vestager, the EU’s competition chief, has laid out options for Rome to address its banking problems without breaking the bail-in principles of Europe’s banking union.

Italy is the eurozone’s biggest vulnerability following the shock outcome of the UK vote to leave the EU, with bank stocks plunging by a third. Concerns are building before the outcome of bank stress test results due this month and a constitutional referendum in Italy in early October, on which Mr Renzi has wagered his job. Citi has described the referendum as “probably the single biggest risk on the European political landscape this year outside the UK”.

After several of its ideas on intervention were rebuffed, Rome is considering whether to act alone.“We are willing to do whatever is necessary [to defend the banks], and do not rule out acting unilaterally, although that would only be as a last resort,” said one person familiar with the government’s thinking. European officials fear any Italian intervention would carry high risks, opening a battle over illegal state support that would put off private investors.

Angela Merkel, German chancellor , last week rebuffed Italy’s request for a suspension of state aid and bail-in rules in order to recapitalise its banks. Benoit Coeure, a senior European Central Bank official, has said any suspension of bail-in rules would spell the end of the banking union “as we know it”.

Mr Renzi has bristled at suggestions he is ignoring rules, saying he will not be “lectured by the school teacher”.

Italy’s business lobby, Confindustria, on Friday warned of “political chaos” should Mr Renzi lose October’s referendum. Under such a scenario, Italy would re-enter recession, spreads on Italian debt would widen and there would be capital flight from Italy, Confindustria argued. Italian gross domestic product would fall 0.7 per cent in 2017 and drop a further 1.2 per cent in 2018, it added.

Zerohedge further explains the situation:

The EU’s “bail-in” banking system failure regime has been entirely dismissed (as Italy proves that when it gets serious, it’s about national rescue, not ‘union’ rules). However, as we warned previously, the real threat is if the local population wakes up to the risk of holding their savings in a financial system that is now teetering on the edge, something Renzi himself admitted when he said that he “hoped to use a liquidity backstop to contain investor panic, which could result in a run on deposits and affect banks’ liquidity.” Because even if it buys up every bond, loan and stock in the world, the ECB will not be able to fix the public’s loss of trust in fractional reserve banking.

Finally, if you haven’t already had enough enough of European bullshit, here is the massive divergence between Italy’s banking system (red) and its sovereign bonds (green) which are remarkably – due to Mario Draghi’s plans – as interconnected as they have ever been in history as banks bought bonds to front-run ECB bazookas…




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