A Look Inside Europe's Next Crisis: Why Everyone Is Finally Panicking About Italian Banks

Tyler Durden's picture

Back in May 2013, we wrote an article titled "Europe's EUR 500 Billion Ticking NPL Time Bomb" in which we laid out very simply what the biggest danger facing European banks was: non-performing, or bad, loans.

We further said, that "Europe's non-performing loan problem is such an issue that there is increasing bluster that the ECB may take this garbage on to its balance sheet since policymakers realize that bad debts and non-performing loans (NPLs) reduce the capacity of banks to lend, hindering the monetary policy transmission mechanism. Bad debts consume capital and make banks more risk averse, especially with respect to lending to higher risk borrowers such as SMEs. With Italy (NPLs 13.4%) now following the same dismal trajectory of Spain's bad debts, the situation is rapidly escalating (at an average of around 2.5% increase per year).

The conclusion was likewise simple:

"The bottom line is that at its core, it is all simply a bad-debt problem, and the more the bad debt, the greater the ultimate liability impairments become, including deposits. As we answered at the time - the real question in Europe is: how much impairment capacity is there in the various European nations before deposits have to be haircut? With Periphery non-performing loans totaling EUR 720bn across the whole of the Euro area in 2012 and EUR 500bn of which were with Peripheral banks."

Now, three years later, the bomb appears to be on the verge of going off (or may have already quietly exploded), and nowhere is it more clear than in an exhaustive article written by the WSJ in which it focuses on Italy's insolvent banking system, and blames - what else - the hundreds of billions in NPLs on bank books as the culprit behind Europe's latest upcoming crisis. 

To be sure, nothing new here, although it is a good recap of the Catch 22 Italy finds itself in: from the WSJ's "Bad Debt Piled in Italian Banks Looms as Next Crisis"

Britain’s vote to leave the EU has produced dire predictions for the U.K. economy. The damage to the rest of Europe could be more immediate and potentially more serious. Nowhere is the risk concentrated more heavily than in the Italian banking sector. In Italy, 17% of banks’ loans are sour. That is nearly 10 times the level in the U.S., where, even at the worst of the 2008-09 financial crisis, it was only 5%. Among publicly traded banks in the eurozone, Italian lenders account for nearly half of total bad loans.

 

Years of lax lending standards left Italian banks ill-prepared when an economic slump sent bankruptcies soaring a few years ago. At one major bank, Banca Monte dei Paschi di Siena SpA, bad loans were so thick it assigned a team of 700 to deal with them and created a new unit to house them. Several weeks ago, the bank put the bad-credit unit up for sale, hoping a foreign partner would speed the liquidation process.

The headquarters of Banca Monte dei Paschi di Siena

 

The U.K. vote to exit the European Union has compounded the strains on Europe’s banks in general and Italy’s in particular. It imperils the Monte dei Paschi sale, some bankers say, and creates fresh uncertainty at a time when lenders are struggling with ultralow and even negative interest rates and sluggish economic growth.

 

Brexit has many executives concerned that central banks will keep interest rates lower for longer than they might otherwise, in an attempt to counteract the slower growth—in the eurozone as well as Britain. European banks’ stocks slid after the vote, with those in Italy especially hurt. Shares in Monte dei Paschi are down roughly a third since the June 23 referendum. All this threatens to spark a crisis of confidence in Italian banks, analysts say. Although Italy has only one bank classified as globally significant under international banking regulations—UniCredit—some analysts say bank stresses worsened by Brexit could threaten Italy’s stability and, potentially, even that of the EU.

 

“Brexit could lead to a full-blown banking crisis in Italy,” said  Lorenzo Codogno, former director general at the Italian Treasury. “The risk of a eurozone meltdown is clearly there if Brexit concerns are not immediately addressed.”

A quick tangent on why in the aftermath of Brexit, Italian banks have been scrambling to get a special permission from Europe to bail-out (instead of 'In') local banks, as the alternative would likely spark a chaotic bank run.

When the financial crisis of late 2008 hit, Italian banks tended to roll over loans whose borrowers weren’t repaying on time, hoping an economic upswing would take care of the problem, say Italian bank executives.Italian banks’ struggles have led to the first serious test of a model the EU adopted two years ago for handling banking woes. The Italian government has sought EU permission to inject €40 billion into its banks to stabilize the system.

 

To do so would require bending an anti-bailout rule the bloc adopted in 2014 to force troubled banks’ stakeholders—shareholders, bondholders and some of their depositors as well—to pay a financial price before the country’s taxpayers must.

 

Rome argues that bending this rule would be a small price to pay for erecting a firewall against possible bank contagion stemming from Brexit. Italy’s EU partners, led by Germany, reject the idea, leaving Rome exposed to the potential for a banking crisis.

... Especially if the man who was in charge of Italy's banks in 2008, Mario Draghi, were to be somehow identified as the key man responsible for Italy's insolvent financial system. However, so far Merkel has been again a full-blown bailout, knowing the further "bending of Europe's rules" would simply mean more German taxpayer money being flushed down the drain.

And while we wait for the outcome of this soap opera which as of last night has seen harsh words of frustration expressed by Italy's PM Renzi and directed at Draghi, here are some numbers:

When the European Central Bank began supervising the eurozone’s largest banks in 2014, things got harder. The new supervisor applied tougher criteria than the Bank of Italy did for declaring loans impaired, say bankers. In April, it forced one bank to take bigger write-downs to bad loans before receiving its blessing to merge with another bank. The result is that impaired loans at Italian banks now exceed €360 billion—quadruple the 2008 level—and they continue to rise.

 

Banks’ attempts to unload some of the bad loans have largely flopped, with the banks and potential investors far apart on valuations. Banks have written down nonperforming loans to about 44% of their face value, but investors believe the true value is closer to 20% or 25%—implying an additional €40 billion in write-downs.

 

One reason for the low valuations is the enormous difficulty in unwinding a bad loan in Italy. Italy’s sclerotic courts take eight years, on average, to clear insolvency procedures. A quarter of cases take 12 years. Moreover, in many cases, the loan collateral is the family home of the owner of the business, or it is tied up in the business itself.

 

“There is a desperate need to make collateral liquid,” said Andrea Mignanelli, chief executive of Cerved Credit Management Group. “Right now, it gets stuck in auctions and judicial procedures that make cashing the loan very hard.”

The problem is that as of this moment, Rome finds itself in a lose-lose situation:

With investors pummeling its shares this year, UniCredit ousted its chief executive, Federico Ghizzoni. Last week, with its stock falling, it rushed to appoint a new CEO, Jean-Pierre Mustier, its former head of corporate and investment banking. In short order, Mr. Mustier must now present a convincing restructuring plan and raise as much as €9 billion to shore up investor confidence. UniCredit declined to comment. The Italian government pushed for a broad solution that would recapitalize banks and draw a line under the bad-loans crisis, when it appealed to the EU for permission to inject €40 billion into the lenders. The Italian government argues that without such a recapitalization move, Italy’s banking problems could mushroom into a broader crisis.

 

“There is an epidemic, and Italy is the patient that is sickest,” said Pierpaolo Baretta, an undersecretary at the Italian Economy Ministry. If “we don’t stop the epidemic, it will become everybody’s problem…The shock of Brexit has created a sense of urgency.”Italian Prime Minister Matteo Renzi pressed the issue in his meeting last week with German Chancellor Angela Merkel.

 

The European Commission, with strong backing from Berlin, has dismissed the push from the Italians. Some European officials privately expressed annoyance that Rome has been slow to deal with its banking problem and is paying the price in such volatile markets. Now, they say, the Italians are using Brexit to press for permission to bend the rules of a hard-fought banking regime.

 

* * *

 

Rome has criticized the EU’s new banking regime and doesn’t want to use “bail-in” rules that prescribe the order in which stakeholders must bear losses for winding down an ailing bank, in part because of the peculiarities of the Italian banking system. About €187 billion of bank bonds are in the hands of retail investors, whose holdings would be wiped out by a bank resolution under the new rules.

 

Last year, more than 100,000 investors in four small Italian banks that were wound up saw their investments wiped out. Some lost their life savings. The controversy exploded in December after Italian news media reported that a retiree committed suicide after losing €110,000 in savings invested in one of the banks.

 

Such problems carry little truck in Brussels. “Every grandmother has bought bank shares,” said one EU official. “That’s how it’s presented to us…. This work has to be done within the rules, using all the flexibility there is.”

In that case, "every grandmother" in Italy has a big problem then, but not nearly as big as Renzi, because if the bank run (ahead of bail-ins) begins, it will all be over for Europe's most insolvent banking system.

Finally, while none of the above is actually new - we have been covering it for over 5 years - so far Europe, and Wall Street, had been successful in ignoring it. As the latest JPM "Early Look at the Market" shows, everyone's attention is finally, and fully, on Italy.

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VinceFostersGhost's picture

 

 

Itexit......get the hell out there man!

MillionDollarBonus_'s picture

This is not even a problem, because these loans can simply be transferred to the ECB, who is willing to do whatever it takes to protect Europe's economy. Unfortunately Britain no longer has the protection of the ECB, and thus their economy is in freefall. Let Britain be an example to the rest of Europe of how disastrous leaving the EU truly is. The only path to prosperity in Europe is through European unity, pure and simple.

IT’S TIME FOR ELITES TO TAKE MATTERS INTO THEIR OWN HANDS
WordSmith2013's picture

The real reason for the panic are the everpresent existential threats in Europe due to Anglo-American aggression.

 

http://themillenniumreport.com/2016/07/a-very-serious-russian-warning-to...

 

A Very Serious Russian Warning To The USA and NATO

 

 

mtl4's picture

Spot on MDB, those Europeans are some lucky to have an ECB that's got their back if things go south.

 

I'm sure Nigel Farage feels so bad about BREXIT that's why he really left politics, the UK is doomed........how dare they!

Antifaschistische's picture

this is all so confusing...first, I thought the entire future of European economic health depended on little Greece.  Then, we find out that the entire future of Europe and the UK depends on England being in the EU club.  Now, it looks like the entire future of Europe depends on Italy.

BaBaBouy's picture

GOLD To $32,000 An Ozs ?

EU NEEDS Much more GOLD Reserves to back up Fiats printed, and restore confidence ...

Back up your fiats with GOLD, Not MORE Printed FLUFF...

GOLD will soar and you will have your rock solid reserves...

 

Stuck on Zero's picture

The problem is not NPLs. The problem is NPGs (Non-Performing Governments).

Rubicon727's picture

this is all so confusing...first, I thought the entire future of European economic health depended on little Greece.  Then, we find out that the entire future of Europe and the UK depends on England being in the EU club.  Now, it looks like the entire future of Europe depends on Italy.

Wouldn't you love to have someone like Paul Craig Roberts succinctly explain in layman's terms what the heck is going on in the EU dictatorship???!!! We at least know it's the EU rules & regs that have caused all this - first and foremost because none of these nations have their own currency anymore. It sounds like they've all been held captive by Brussels.

Philthy_Stacker's picture

Sorry you're wrong, friend of MDB (yiikes!)

"those Europeans are some lucky to have an ECB that's got their back" HA! They've got the shirt off their backs maybe! The ECB! Listen to the words coming out of your mouth. You are either one of the bankers we hate here on ZH or you are an ignorant buffoon. You could also be both.

Question for mtl4: How does the ECB get your back'? Explain that one please.
All I get from you are your 'feelings' on the topic but no facts, figures nor informed opinion.
The two most descriptive words in your post were 'lucky' and 'feels', followed closely by 'doomed'. These words are often used by people that don't really know what they are talking about to stir emotion in the reader, much like Donald Trump. No substance but lot's of rhetoric.

Bill of Rights's picture

You must be slow, he was obviously using satire...

Philthy_Stacker's picture

Don't think so Bill. They gave props to MDB right off the hop. Also, no /Sarc or /S, therefore free game.

Philthy_Stacker's picture

Oh, and you started with an insult. Very classy to assume I'm slow.
Shall we play a game?
Pick one, I'll woop your ass!

Woodcock Johnson III Tests of Cognitive Abilities
Stanford-Binet Intelligence Scale-V
Universal Nonverbal Intelligence
Wechsler Individual Achievement Test (WIAT-III)

There's a few more but I fear I may be too slow to pass those.

Kaervek's picture

Sarcasm - heard of it?

 

The ECB is one of the reasons Europe is going down the shitter quick

Food Loaf Junkie's picture

The best you can hope for if the ECB has your back is a reacharound.

Philthy_Stacker's picture

Nice try. European commoners have their hands too full to worry about a battalion of 'multi-national' armed NWO enforcers on some border way East of Ipswich. Citizens are revolting, against the theft of all their accumulated wealth since WWII, by bankers. They don't like being told how many immigrants or how much taxes by some ponce with a German accent that they didn't vote for.
The Euro zone is done, finished cap-put. Put a fork in it!

So, while I agree the Anglo-American aggression is causing concern, the collapse is purely financial. Not to say that it won't eventually lead to military intervention., which is what the Elites need to cull the uprising.

Mr. Kwikky's picture

On topic: Deutsche Bank is a much bigger problem, they are exposed for rigging the gold/silver prices and they are more than 300 Billion dollars in debt....and counting

Off topic: don't isolate incidents and developments..

Vageling's picture

May I suggest suicide? I mean only death cures a fool as the Japanese say. I'm getting tired of your stupidity.

Ghordius's picture

may I suggest you appreciate a bit MDB's high art of trolldom? he puts a lot of effort into sounding like the caricature of official MSM media of "liberal bent", and this has a history slightly longer then sixteen weeks

ZH's "regulars" have a bit more depth then what some might think, you know? (no, I do not include myself in this club, I am more something nobody remembers how it got through the door, past the doorman)

GreatUncle's picture

Ghordius, BREXIT is past now and Merkel wants it all to quieten down a bit.

Got to admit I bite when I see the word BREXIT had enough of it won't happen neither because not one MP in parliament is prepared to do it. So they are going to string the EU along for a bit you watch.

The issue now is as the EU needs more money to prop up its banking system the UK is conveniently on the sidelines. Where did you think the BOE CTRL-P will be spent? Yup supporting the ECB you watch.

Philthy_Stacker's picture

Lesson to all you 'touchy feely' Euro pussy posters. Great Uncle has made a valid point. I don't agree with any of of it, however, he said it with intelligence and grace. If you want to be relevant on ZH (which I believe is a glorious endeavor), then you have to make sense and cool the racism. You can be wrong, just don't be a complete loser...

Byte Me's picture

Yeah, but it's not the actual really original MDBag that originally made such pithy comments is it?

 

brushhog's picture

Britain will have its own central bank to bail them out, they can print funny money as well as the ECB. England has a much lower debt to gdp than the european union

MillionDollarBonus_'s picture

But the Bank of England is much smaller and can only issue pounds, which are soon to be worthless now that Britain has ignited an economic disaster.

Philthy_Stacker's picture

Wrong! The GBP will outlive the Euro. Now they can more easily isolate themselves from the Euro crisis unfolding. Britain is not solely responsible. ECB has drained all the liquidity from the entire bloc of Euro countries, toward Germany and Brussels. The Euro is backed by the promise of a non-elected collection of Elite bankers, as opposed to a centuries old democracy, that has been beating back fascism for millennia. Britain will not "go quietly", instead, they will strengthen their currency with tangible asset backing and they will either move into Gold and Silver or they will fall. Just like every currency on Earth is about to experience. You can't stop it MDB. It's bigger than even your ignorance.

Philthy_Stacker's picture

Having said that, death to the moneychangers!

Okienomics's picture

Speaking of moneychangers... It is becoming more clear with each passing day that the "solution" of ending the debt crisis with more debt is failing, and that the ONLY end-game solution is a "debt jubilee."  But how would a debt jubilee occur in modern times?  Pretty simple, by replacing the currency with a new currency.  This is the final solution, folks.  Anyone owing debt would be able to then pay it back with suddenly worthless dollars, euros and yen.  Anyone holding those currencies would "exchange" them for the new currency at the prescribed rate.  And anyone owning the debt would be wiped out.  Think the bankers (who own a lot of debt) would complain?  Not if they were specifically reimbursed by way of a debt swap.  

Think of it, absolute debt forgiveness very suddenly, and total recapitalization of the banks in a single day.  Sure, non-bank debt holders would be wiped out, but who's going to come to their rescue or shed a tear?  And every common Joe with a mortgage would be all in favor of it.  The politics would sail through and the debt crisis cured.  We just need a trigger.

RaceToTheBottom's picture

SDR was created and waiting just for that purpose.  

 

All Fiats are hanging all their hopes on that one exchange....

I would much prefer all Banksters hanging from the local lampposts.

 

 

DuneCreature's picture

You are truly amazing, MDB.

Live Hard, Try Not To Be A Lynch Mob Magnet, Die Free

~ DC v2.0

Okienomics's picture

Holy crap, anyone notice that MDB's site has TRAV777 as a contributor and commenter?  I always hated TRAV's over-the-top racism but perhaps I missed it...  Could MDB and TRAV777 be the same person?  If so, s/he is a twisted, satirical genius.

Huh Reeeally's picture

You're right, this is not a problem, THE PROBLEM is people like you spouting this bull$hit, whether you believe this crap or not.

Change is good.

GreatUncle's picture

Checked he is an American Patriot some acreditedtimes.com site.

Like Keynes and beleives in slavwery to elites so that automatically tells you his mindset.

bamawatson's picture

there's whose answer; the cite he linked does not exist; what is the source of his "information"

i repeat my question --- Who Pays MDB?

Kina's picture

MDB has been around for ages, I remember when he started up his approach. It is a deliberate wind up of evreybody and quite meant to be over the top.

Philthy_Stacker's picture

You see, now that makes sense. A Psycho, pure and simple. I wish MDB would take me on, I'll eat his fuckin' lunch.

Philthy_Stacker's picture

What's this I see> A down arrow but no rebuttal. MDB is a chicken shit!

Philthy_Stacker's picture

If he doesn't make money pissing off hundreds of ZH followers, why is he here?

Memedada's picture

MDB is an asset of this site. The comment section is only enriched by diversity of opinions. The comments he makes are never dull and are always in alignment with MSM (the part playing the role as supporting the one site of US’ one-party-system). In other words he makes some good background for the more enlightened ZH’ers (there’re few, but they’re there – most are, however, unconscious controlled opposition. Like the US corporate sponsored version of “libertarians”). I don’t think he’s a paid troll – his remarks are a caricature of MSM.

bamawatson's picture

i clicked acreditedtimes.com; found no such site

anyway, my questions was simple WHO PAYS HIM

your post does not addres my question

Okienomics's picture

No such site?  Check your spelling and get back to us.  Or just click on MDB's link.  Damn.

bamawatson's picture

wow you are brilliant; boy i best not ever go one on one with you joe

such a clever grade school comment

 

GreatUncle's picture

You never get positive ratings then from the bullshit you spouse.

Best tip and Merkel would appreciate it is to not to mention the word BREXIT hoping it goes away ... if you get the drift.

But as you mentioned it ...

The UK parlimanent is a sovereign nation it takes precedence over everything and no future parliament can be bound by the current one. At that point BREXIT, article 50, and people are getting annoyed, we as a sovereing nation extend our courtesy to not just rip up the fucking Lisbon Treaty as we are entitled to do beng sovereign GET IT?

You really need to go figure out some key facts and like everybody knows if you have your own central bank i.e BOE and Carney is showing and even Trump has exclaimed the same ... you just fucking CTRL-P. Now crushing the pound is good, although I would not want to trade with europe because it was negative anyway us buying more than we sold.

But if we BREXIT, we can sell to China, Russia, India and Iran ... awesome and we will be cheaper and those countries are not in the TTIP the EU is stiching up the european people with. On top of that we can pull out of NATO and a whole host of other elite institutions you like to support.

Do carry using the BREXIT word ... each time you do in a derogatory way just like Junkers you will piss off those hoping it goes away and actually supports the BREXIT cause.

Chears bud ... keep going on the BREXIT though.

 

WayPastCaring's picture

I'm replying to you only to let you know I despise what you post and will no longer even bother acknowledging them nor will I read them. And your blog and Twitter accounts are a complete joke.