Italian Banking Crisis Looms

Italian Banking Crisis Looms.

The World’s oldest bank, Banca Monte dei Paschi di Siena was established in Italy in 1472.  It was the first time an individual’s money was offered security in holding funds on your behalf albeit backed by state land rather than gold and silver in the case of later UK and Dutch Banks.

Today, this bank is Italy’s third largest bank and seeking its third bailout as it struggles with new capital adequacy requirements and EU restrictions on support with a €40bn+ ‘black hole’.  It is estimated by the International Monetary fund that collectively, Italian banks have a €360bn+ deficit.  The Banca Monte dei Paschi di Siena issue needs solving by the end of July.

This is a political 'hot potato' that no one in EU seems to want to deal with.  Overtures have been seen from both the Germans, the Dutch and the Belgians that Italy must deal with it herself as any further bailout contravenes EU laws.

What does that mean?

It means that banking shareholders are losing money as share prices tumble, it means that banking bond holders may lose money.  Much of these losses will be borne by the small saver/investor.

What do we think?

This banking crisis is unlike the US/UK/EU’s credit crunch of 8 years ago, where banks got into trouble with toxic property loans, where eventually property prices have recovered.  In Italy, toxic banking debt has come from lending too much money to small businesses that have now ceased trading.  In summary, at least in the UK/US there was an asset that the loan was secured on, that is tangible property and values have now partially or fully recovered, in Italy it is debt that has ‘died’ with the small business, i.e. there is little chance of large scale recovery.

Italy has been in recession for many years resulting in many small businesses folding and if banks get into trouble, it is the small investor that will suffer.  Like we say, a political ‘hot potato’.

Italian Bank Bailouts

Europe has tightened rules on bank bailouts, so there is little sympathy within EU.  There are spats between Italian leaders and other EU members.  Britain voting Brexit has also sent across more shock waves as we may not be around to contribute.

Red Alert Status

This is why we remain ‘red’ for stock market investments, bond investments and property investments, despite the recovery in leading share indices like the FTSE 100 over the last few weeks, we still believe this is going to be a ‘rocky’ summer.  Look out for Italian bank news over the next 2 weeks.