A crisis looms in the shaky banks of Italy

Viewpoint: Pittsburgh Post-Gazette Waiting down the road for an already belaboured European Union is another potential crisis: Italian banks are in bad shape, facing the release of the results of a European Central Bank stress test July 29.

The EU has already had to deal with the Greek financial disaster, focused — as the Italian problem will be — on the euro currency. That has gone only reasonably well. Greece is still in the EU and eurozone, but its unemployment is the highest in the bloc. Then came the British referendum decision June 23 to exit the EU. The British were not in the eurozone, but Europe was still shaken badly financially by Brexit.

Now come the Italian banks. Italy is the EU’s fourthlargest economy. Its unemployment rate is second only to Greece’s. Its economy is considered to be overregulated and productivity low. Italy’s banks hold an estimated $400 billion in shaky loans, only $180 billion of which are covered by assets. Of the banks’ bond stock, 55 per cent is held by private investors. That is to say, if a bank stumbles or goes under, private investors will take a large part of the fall, risking the whole Italian economy spiralling downward. The smoke is rising most visibly from Siena’s Monte dei Paschi, the world’s oldest bank and Italy’s third-largest. The largest and second-largest, UniCredit and Intesa Sanpaolo, have also seen major drops in share price.

Italy benefits from the fact of low expectations: Its economy is generally considered to be inefficient and corrupt. At the same time, the EU cannot afford a major crisis or, worse, a financial crash in one of its primary members at this point. Italian Prime Minister Matteo Renzi, in power since 2014, is doing reasonably well. But he is counting on a referendum containing important constitutional reforms passing in the fall and has the burgeoning Five Star Movement, which took mayoral races in Rome and other cities in June elections and opposes Italy’s continued membership in the eurozone, breathing down his neck.

The ECB, the International Monetary Fund and Germany need to watch this one very carefully and try to ensure that Italy doesn’t crash and burn on this problem. Neither the EU nor Europe nor the United States needs this problem at this point.