Italy's Renzi Goes Toe-to-Toe with the EU over Italy's Troubled Banks

Steve H. Hanke's picture

Only 17 percent of Italy’s money supply (M3) is accounted for by State money produced by the European Central Bank (ECB). The remaining 83 percent is Bank money produced by commercial banks through deposit creation. So, Italy’s banks are an important contributor to the money supply and, ultimately, the economy.

In anticipation of poor results from the Italian banks’ stress tests (which will be reported on July 29th), Italy’s Prime Minister, Matteo Renzi, has indicated that his government will unilaterally pump billions of euros into Italy’s troubled banks to recapitalize them, so that they can continue to extend credit and contribute to the growth of Italy’s broad money supply. There is a problem with this approach: it is not allowed under new EU rules. These rules require that bank bondholders take losses (a bail-in) before government bailout money can be deployed. But, in Italy, a big chunk of bank debt (bonds) is held by retail investors. These retail investors vote in large numbers. So, the EU bail-in regulation, if invoked, will certainly put Renzi’s neck on the chopping block. And that will come sooner rather than later because the Prime Minister has called for a referendum on Italy’s constitution in October and stated that he’ll resign if the referendum is voted down.

It’s no surprise that Renzi has his eye on banks. It’s also easy to see why he is worried and ready to pull the trigger on a state-sponsored bank bailout. The accompanying chart on non-performing loans should be cause for concern.

To put the non-performing loans into perspective, there is nothing better than the Texas Ratio (TR). The TR is the book value of all non-performing assets divided by equity capital plus loan loss reserves. Only tangible equity capital is included in the denominator. Intangible capital — like goodwill — is excluded.

So, the denominator is the defense against bad loans wiping the bank out, forcing it into insolvency. A TR over 100 percent means that a bank is skating on thin ice. Indeed, if the non-performing loans were written off, a bank with a TR in excess of 100 percent would be wiped out. All of the five big Italian banks in the accompanying table — including the Banca Monte dei Paschi di Siena (BMPS), the world’s oldest bank — fall into this ignominious category.

They need to be recapitalized. This could be done by issuing new shares on the market. But, all these banks’ shares are trading well below their book values. BMPS’ price is only about 10 percent of its book value, and Intesa Sanpaolo (the best of the lot) is only about 66 percent. In consequence, any new shares issued on the market would dilute existing shareholders and be unattractive. This is why an Italian state rescue is the most attractive source for the recapitalization.

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yngso's picture

There was a poll about who will start first with helicopter money - Japan got most votes - but the real biggie is who will trigger the crash. Right now for me there's a tie between China/Hong Kong and Italian banks.

Bubbette's picture

Anyone remember the PIGS?  Well, they are coming home to root for truffles.

Stu Elsample's picture

A whole lot of bankers and globalists need the Mussolini treatment

Yellow Zookaninnie's picture

Hopefully, on the inaugural podium President Trump will announce that it is time to get on with the pogrom and kick out all those traitorous scum with foreign agendas and dual citizenship and loyalties who infest our government. Those, along with their CFR, bankster and other assorted masters. DEPORTATION is good national therapy. Send their asses to Vietnam where the re-education camps could be reopened under contract to the US.

GoldenDonuts's picture

Hey you market geniuses  I think that the way to go is to buy gold and sell euros.   It seems to me that my gains could be infinite if the euro goes to zero.  There is an ETF that does this it is labelled GEUR.

I see the name Gartman in this thing and the amount of fun that you guys poke at this guy is incredible.  Opinions on this this ETF?

shovelhead's picture


Wait a minute. Since when did Italians have a problem collecting on a loan?

Not in my old neighborhood. You got one late notice, and after that, you paid or you were singing 'Into the Mystic'.

anarchitect's picture

"This is why an Italian state rescue is the most attractive source for the recapitalization."

And after the recapitalization, what?  Same shit a few years down the road.  The underlying model is wrong and needs to be fixed.  Put depositors on notice that banks will no longer be bailed out.  Put bank principals on notice that they will be liable, to the full extent of their personal assets, if their bank fails.  Put central bankers on notice that the US Coin Act of 1792 has been adopted, such that the penalty for debasing the currency will be death.

RaceToTheBottom's picture

Exactly in over 214 years, we have learned nothing....

Must be some strong motivation to be making the same mistakes that we had done such a long time ago.  Oh yeah, WS Bankster money...

PGR88's picture



The statist, fascist, leftist nanny state and its political and business cronies exist SOLELY because of fiat money and central banks.  Control the money supply, and you control everything in society.



L_Estasi_dell_Oro's picture

That's why precious metals and precious numbers (cryptocurrencies) are so important. 

BurningFuld's picture

It's odd how giving away a bunch of money is always the best solution.

JamesBond's picture

An Italian state rescue???  Where are they going to get the money?  The 'state' is insolvent?  How can I short this train wreck of a country?



yngso's picture

I agree, this a totally absurd. Only the ECB can print new fake money, and they don't want to. Renzi would have to steal it from some budget post(s). Would that be a slower political suicide than a bail-in?

Al Tinfoil's picture

"An Italian state rescue???  Where are they going to get the money?"

Noooo Problem for a modern sophisticated banking system...  The Italian government borrows from the banks, and uses the money to buy the banks' new share issues.  The loans to the government go on the banks' books as capital assets.  The loans are funded by the banks according to the Fractional Reserve system (if the bank has 1 Euro in capital, it can lend 10 Euros out of thin air).  The banks' new shares go on the government books as assets, and the money paid for the shares goes on the banks' balance sheets as capital reserves.  Changeo-Presto, balance sheet capital shortage solved, and the banks and government are magically richer, while some bankers and traders earn some fees, and some of the cash might just fall off the table and be "lost" to a crony, or be donated to a politician, during the process.


While they are at it, they could solve the Non-Performing Loan problem too.  Simply convert all NPLs to Zero-Interest Rate No Payment Until Maturity Loans With Renewable Due Dates, or ZIRNPUMLs.  The maturity date on each loan would be renewable at the option of either lender or debtor, in perpetuity, so no loan need ever go into default, and no payment ever be required.  The loans could stay on the lenders' books as assets.  This process uses the popular Modern Monetary Theory along with ZIRP and Extend and Pretend, all of which are well-established and fully endorsed in banking and political circles in Europe, so no new mental gymnastics would be required to implement this process.  And these NPL/ZIRNPUMLs could remain on the banks' balance sheets as assets.  

yngso's picture

This reminds me of Japan and perpetual bonds aka helicopter money.

bob_bichen's picture
bob_bichen (not verified) Al Tinfoil Jul 28, 2016 1:54 PM

Gentle Readers:  I believe we have a genius here.  By simply combining the basic elements of Modern Monetary Theory ©® with essential ingredients of ZIRP and NIRP, thereby brilliantly conjuring Creative Financing Tools such as "Zirnpummels" AI Tinfoil has literally shown us the way out of the Tunnel of Dispair.

The transitory inverse increase events in the equity value of this hallowed Italian Banking Institution will now be a thing of the past, thanks to enlightened and progressive thinkers such as AI. 

Where would we be without such brilliance?

yngso's picture

- And hey presto, the NWO is in place, and banksterdom rules world!

RaceToTheBottom's picture

When you peal off all the layers, this will end up being a grab job for Italy's gold.....


Dragon HAwk's picture

Gentlemen I think we have found our Central bank Spy, this guy knows too much.

JamesBond's picture

See, this is why i ditched my MBA seeking girl friend in college.  Maybe that was a  mistake after all....