Italian banks in focus as EU ‘shrugs off’ Brexit – for now
MILAN, July 27, (AP): About a month on from Britain’s vote to leave the European Union, there’s little evidence that economic activity across the continent has been derailed yet.
That’s some reassurance for the 19-country eurozone as it faces a host of other problems, many of which relate to Italy, the bloc’s third-largest economy. The country has to shore up its banks — and will get some idea Friday of the scale of the problem when regulators publish the results of EUwide bank stress tests.
Separate figures Friday will also show how the eurozone economy was faring in the run-up to the British vote. Analysts estimate that the quarterly growth rate halved to 0.3 percent in the second quarter compared with the first for a variety of reasons, including the pick-up in the price of oil, concerns over a slowdown in China and uncertainty ahead of the British referendum on June 23.
No doubt the vote for so-called Brexit has proven a shock to many and a jolt to the European project of political integration. But so far the economic fallout appears to have been contained. Surveys of business activity, such as the Ifo index of German business confidence, have shown resilience, in marked contrast to those assessing the state of the British economy.
“Europe already appears to have moved on,” said James Nixon, chief European economist at Oxford Economics.
Nixon said “the more immediate challenge” for European policymakers is the constitutional referendum in Italy expected this fall, “where the government currently faces a good chance of succumbing to the same sense of populist disaffection that prompted Brexit.”
The Brexit vote has raised the stakes in Italian Premier Matteo Renzi’s upcoming referendum on a raft of changes designed to streamline the country’s political system. Opinion polls point to a close outcome. Defeat could lead to Renzi’s resignation, early elections and fresh uncertainty over the direction both of the EU and of the eurozone itself.
In the meantime, Renzi has another problem to contend with — the financial health of Italy’s banks. Renzi is looking for a way to rescue them from a pile of bad loans that aren’t being repaid.
Italian banks have been worn down by some 360 billion euros ($400 billion) in loans that won’t be paid back in full. Given Italy’s size, any negative fallout would far outweigh the impact from the repeated problems over the past few years, notably in Greece.
Any rescue attempt that involves the use of public money could run into resistance from the EU, which recently introduced new rules to avoid a repeat of some of the recent bailouts that afflicted the eurozone. During the region’s debt crisis over the past few years, the perilous situation of some banks was at the root of some of the bailouts.
Under the terms of the new rules, taxpayer money can now only be used after bank creditors such as bondholders have been “bailed in,” meaning they lose some of their money first. That provision was aimed at making sure that the cost of rescuing banks doesn’t overwhelm the state’s finances as they did in the case of Ireland.