A cri­sis looms in the shaky banks of Italy

The Hamilton Spectator - - OPINION -

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.

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