Stocks across Europe have renewed their slide yesterday and today, as investors cashed out after markets experienced a rebound late last week following the immediate shock of the Britain’s referendum. Reports released today indicate that economic activity across the Eurozone was stagnant in June ahead of the Brexit vote, adding to jitters.
As we noted this weekend, the real impact of the Leave victory is being felt far afield from the Britain’s shores. Italy’s troubled banking sector, which never properly dealt with its toxic debt load after the global financial crisis of 2008, has been hammered by markets this year. The eurozone’s sluggish performance has analysts predicting that interest rates will stay low for quite some time, and Italian banks, which some estimate have as much as 17 percent of their loans classified as non-performing, are particularly poorly-equipped to deal with this. The Wall Street Journal:
The profitability of Italian banks has long been among the worst in Europe, weighed down by bloated staffs and too many branches, leaving the banks with little extra capital to cover loans that go bad. Today’s low interest rates have hit Italian banks especially hard because of their heavy focus on plain-vanilla lending activities, with relatively little in fee-generating activities such as asset management and investment banking.
After a privately-capitalized bailout fund on Friday took control of a second troubled Italian bank, all eyes have been on Banca Monte dei Paschi di Siena, the likely next domino to fall. Monte dei Paschi had lost over 75 percent of its value this year, and at time of writing had shed 7.5 percent just today.
The Italian government has been sending mixed signals as to how it would proceed. People familiar with the government’s thinking thinking told the FT over the weekend that Rome would act unilaterally to secure its banking sector, but then rowed these remarks back yesterday to Reuters, insisting that any moves would be coordinated with Brussels. At issue are EU regulations, adopted in 2014 but only in force since January, on how eurozone bailouts are to be handled. The regulations stipulate that no public funds can be used to bail out banks before private sector creditors take a haircut totaling 8 percent of the bank’s liabilities. It’s abundantly clear to Italy’s Matteo Renzi, who has vowed to resign if an October referendum on internal reforms fails, that insisting outright on such a haircut is the political equivalent of slitting one’s own throat.
The EU cannot survive indefinitely as a B&B operated by Procrustes, but Brexit seems to have taught the bloc nothing. Could an Italian banking crisis be next? One thing to watch for is whether a “bank walk” develops in Italy—that is to say whether a lot of Italians quietly start moving their money into German or other EU banks—as the shadows of the crisis lengthen. There are a lot Greeks who are very glad they did this before capital controls—still firmly in place one year later—came into force.
Needless to say, none of this bears any resemblance to anything that Jean Monnet, Robert Schumann or Alcide de Gasperi had in mind when they started the EU back in the 1950s…