Look Who’s Frantically Demanding that Taxpayers Stop Italy’s Bank Meltdown

New Opportunities for “America’s Most Corrupt Bank.”

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

It was a perfect gift to a desperate market. All that was needed was a gentle hint that Italy’s troubled banks and their bondholders might not be hung out to dry. A “public backstop” for Italy’s weakest lenders would be a “very useful” measure in these “exceptional times,” ECB President Mario Draghi said.

Most Italian and European bank stocks surged.

The ECB is the second member of the institutional triad formerly known as the Troika to have called for a taxpayer funded bailout of Italy’s banking system. Earlier this month the IMF used its article IV consultation – an annual economic and financial health check – to warn of “global spillovers” from a full-blown Italian banking crisis, “given Italy’s systemic weight.”

Desperate times call for “significant measures,” says IMF economist Juan Toro. These measures include a taxpayer-funded state intervention, a practice that was supposed to have been consigned to the annals of history by Europe’s enactment of new bail-in rules on Jan 1, 2016. The idea behind the new legislation was simple: never again would taxpayers be left exclusively paying to bail out bondholders of Europe’s insolvent banks.

But even before the ink has dried, the new rules are about to be broken, or at least bent beyond recognition. Apparently this is necessary for two main reasons:

a) To save the small investors. Under the EU’s new bail-in laws, Italy’s government can only create a bank rescue package by making bondholders pay for a bailout by converting a portion of their bonds into equity. But roughly one-third of senior bank debt and half of subordinated bank debt, worth a combined total of €235 billion, has been sold, with the government’s overt blessing, to small Italian retail investors and savers, in lieu of CDs. If the bail-in rules are followed to the letter, hundreds of thousands of little people will be taken to the cleaners.

b) To avert a political bloodbath. If hundreds of thousands of Italian retail investors are sacrificed in this type of bondholder bail-in, Italian Prime Minister Matteo Renzi’s chances of winning the do-or-die referendum on changes to Italy’s constitution in October will be further impaired. A public backlash over a bail-in could lead voters to turn to the 5 Star Movement, which has called for a referendum on Eurozone membership. The mere prospect of such an outcome would be enough to trigger a surge in bond yields, credit-rating downgrades, further economic slowing, and added troubles for banks. Oh, and it could be the final nail in the Eurozone’s coffin.

Conspicuously absent from the bleeding-hearts narrative is the even greater risk of contagion to other financial institutions, not just in Europe but all around the world. Almost all the talk is about protecting small-time investors, but what about the big fish?

The Real Risk

The total exposure of French banks and private investors alone to Italian government debt exceeds €250 billion. Germany holds €83.2 billion worth of Italian bonds. Deutsche bank alone has nearly €12 billion worth of Italian bonds on its books. The other banking sectors most at risk of contagion are Spain (€44.6 billion), the U.S. (€42.3 billion) the UK (€29.8 billion) and Japan (€27.6 billion).

Not to mention the more than €200 billion of currency and transferable deposits that international banks are estimated to have exposure to in Italy, or the roughly €150 billion in bank bonds and loans they own.

But not to worry! According to Jay Bryson, global chief economist at Wells Fargo Securities, foreign exposure to Italian banks is “relatively contained” (emphasis on “relatively”). All of which helps to explain why banks and their representatives at the IMF and the ECB are frantically demanding a no-expenses-spared taxpayer-funded rescue of Italy’s banking system.

Leading the charge is America’s biggest bank by assets, JP Morgan Chase.

“It’s necessary to do it [bail out the banks], and the sooner the better, in order to nip in the bud one of the root causes of uncertainty gripping the markets,” said Lucía Gutiérrez-Mellado, deputy director of strategy for JP Morgan Asset Management.

One word that keeps popping up is “flexible” — in particular in relation to the application of Europe’s new banking rules. Here’s JP Morgan Asset Management’s Chief Market Strategist for the UK and Europe, Stephanie Flanders on Bloomberg:

If this is not dealt with in a clear but flexible way, it could be something that adds to the contagion risk, and in many ways it poses a bigger risk to the European economy than Brexit on its own.

Naturally, the interviewer failed to ask Flanders about her own employer’s level of risk exposure to an Italian banking meltdown.

New Opportunities for “America’s Most Corrupt Bank”

Bailing out Italy’s banks is not just about risks; it’s also about opportunities. JP Morgan Chase, which Forbes recently dubbed “America’s Most Corrupt Bank,” is already at the front of the line. According to the Telegraph, JP Morgan has been appointed by the Italian government to work on plans to set up a bank to buy €50 billion of troubled loans from the banks at approximately 20% of face value, so about €10 billion.

The deal would provide not just juicy fees, but also a privileged bird’s eye view of the real health and vulnerabilities of Italy’s largest banks. This might clean up the banks, The Telegraph said, but it “puts the country’s authorities on a collision course with the EU, which does not want taxpayers bailing out banks before private investors take a hit.”

Unless, of course, the risk begins to spread from the periphery toward the core of Europe’s financial system, at the slow-beating heart of which is Germany’s biggest financial institution – and according to the IMF, the world’s most dangerous – Deutsche Bank. Now, with two-thirds of the institutional triad formerly known as the Troika firmly on board with the bailout plan, surely it’s just a matter of days or weeks before the purse strings of Europe’s taxpayers are loosened once again for the benefit of banks, their executives, and their bondholders. By Don Quijones, Raging Bull-Shit.

Contagion is the reason Italy’s banking crisis is all of a sudden Europe’s biggest existential threat. Read… Who’s Most Afraid of Contagion from Italy’s Bank Meltdown?

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  29 comments for “Look Who’s Frantically Demanding that Taxpayers Stop Italy’s Bank Meltdown

  1. OutLookingIn says:

    “It’s [bail out the banks] necessary… in order to nip in the bud one of the root causes…”

    The “root cause” ???

    How about wearing the shoe that fits! The too big to fail or jail banks like JP Morgan would be “one of the root causes”.

    • Aussie says:

      Agreed, but the people should “burn JPM to the ground” all around the globe! The day is near, and I have a truck load of explosives ready too….

      • OutLookingIn says:

        lmao… I have matches!

        Just watched and listened (all 73 minutes!) to Donald Trump’s nomination acceptance speech. He spoke and expressed himself like a President.
        Come January 20, 2017 there is going to be a new Sheriff in Washington. The boys on Wall Street and in the smoky back rooms of capital hill, had better pack their tucker bags and getta going, while the gettins good!
        Because he spoke of enforcing the letter of the law and coming down hard on corruption. I think Hillary had better plan on an extended vacation at crow bar hotel, compliments of Uncle Sammy!

        • Marty says:

          The problem is who owns the voting machines.

        • syka says:

          OutLookingIn: Why do you believe so much that Trump as New Sheriff in town will go against the boys on Wall Street ?? The Guy has made his fortune thanks to low rates and Leverage. Do you think he is willing to loose 2/3 of his wealth to fulfill …Promises he made to get elected ? I am not sure to understand…

        • JerryBear says:

          Is the sky purple on the planet on which you live? Your delusion is total.

          P.S. Prepare to weep…..

        • Markar says:

          He talked a good game of law and order on the streets, but not a word about law and order on Wall St. If he was serious about turning the real economy around, he’d put an end to “Too Big To Fail” and “Too Big To Jail.”
          One can only hope at this point.

      • d'Cynic says:

        Why not just wait. The present status quo is a self driving truck full of explosives waiting to hit the wall.

  2. nick kelly says:

    Germany is going to sweat over 80 billion, or one month of the Fed’s QE?

    There is a lot of bafflement out there but one that is a contender is the idea that Italy would be better off outside the Euro zone.
    Anyone like to hazard a guess what Italy, by itself, would have to pay to sell a bond?
    I’m going to take Argentina’s rate to place a 30 year- 7.5%

    • nick kelly says:

      Now that I reflect I realize the author didn’t imply that 80 was a huge
      matter for Germany, although of course the collapse of the Italian banking system would be.
      I think Germany is more concerned by the geo-politics than the money.

      However if Germany returned to the DM ( God what a currency stampede that would set off) you wouldn’t be able to buy a Jetta for 17K Canadian $

    • Wolf Richter says:

      Thing is, Argentina has very little debt … because it couldn’t borrow in dollars until recently, and because it destroys all its peso debts by destroying its peso. Over the next few years, it’s a much lower risk than Italy, which is drowning in debt.

      If Italy leaves the euro and has to refinance its debts at 7.5% or even 5%, interest payments would be astronomical, and Italy would have to print lira like crazy (to buy euros to service that debt), and the lira would be devalued much faster than anyone can deal with, and it’s going to be a huge mess.

      • nick kelly says:

        Ya I was kind of thinking along those lines- that 7.5 was generous except my thinking was more primitive- it was that Argentina has confronted harsh reality and turned a corner- which Italy has yet to do

      • nick kelly says:

        I think Italy might have to default to leave the euro and return to the lira. Unless there is another solution.

      • JerryBear says:

        i suspect that Italy would be forced to default on its debts. If that happens, first Greece and then the entire Southern tier of countries would follow suit and then the Euro and the European union would be finished.
        If the Italian people are going to be forced to choose between starvation and default, they will choose default even if they have to overthrow their government to do it.

        • George McDuffee says:

          RE: If the Italian people are going to be forced to choose between starvation and default, they will choose default even if they have to overthrow their government to do it.


          One would like to think so, but recent history in Greece and the other countries in financial/economic distress, which received the benefits of the IMF purgative/emetic treatment, after binging on “globalization” debt, indicates otherwise.

  3. interesting says:

    bailouts do not work, it only breeds more reckless behavior since those being reckless know they will be bailed out.

    can we just admit that our economies are NOT based on capitalism, it can’t be because there is no such thing as a bailout in capitalism. OR is it just capitalism for there rest of us when your entire industry is gutted and shipped to China?

    • Ensign Nemo says:

      We have socialism for the banksters, in the form of bailouts whenever they screw up.

      We have socialism for politically correct poor people, such as single mothers.

      We have crony capitalism for the middle classes, where employers are allowed to export entire industries and import cheap labor at will, under rules that the employers wrote for Congress to rubber-stamp.

      Corporations such as Disney even force their employees to train their H1B replacements just before they are terminated.

      If they refuse, they are “fired for cause” and collect no unemployment benefits, after those employees paid into the unemployment fund for years or even decades.

      Privatize all profits, socialize all losses, and then bribe Congress with a slice of the profits that you have just privatized – that’s the essence of crony capitalism.

  4. MC says:

    One needs to understand three extremely important things.

    First: nobody, not even Italian banks themselves, has a clue of how big the NPL problem is.
    Second: closely tied is the quality of collaterals backing these loans, which is far lower than originally booked for and threatens to blow the lid of Italy’s grossly overpriced housing market.
    Third: M5S cannot be allowed to take power, period. After the ruling party lost the city of Rome the order is to do “whatever it takes”.

    We have all heard Italy’s mountain of NPL’s is now estimated at €360 billion, but is it truly so? Just one year ago it was estimated at less than half of that. Now there are rumors those 360 billion are just the debts banks consider dead and gone, meaning those on which repayments stopped over six months ago and which are backed by very poor collaterals.

    Which leads us to the big problem. I’ve already written in the past of how Italy attempted replacing its manufacturing sector (which has been decimated by competition from Germany, lack of investments/infrastructures and an impossible tax code) with housing.
    It didn’t quite work out long term and it has left a burst bubble which foretells what will happen in China once their own bubble bursts.
    One of the chief reasons Italy’s economy is way beyond crummy is closely tied to the decision not to allow the housing bubble to liquidate: book values have to remain high because high values mean high quality collaterals. This is typical of the last decade or so: not allowing liquidation strips capital from the rest of the economy, exacerbates existing problems and creates new ones.

    Finally there’s the political side of things. M5S is probably the most rabidly anti-EU political movement in Europe and its peculiar leadership structure makes impossible decapitating it in one fell swoop like Greek authorities did with Golden Dawn. And it’s also the protest movement with the best shot at power in Europe. And this cannot be allowed.
    I should go on a long rant about how M5S’s appearance was one of the only two earthquakes in Italy’s stagnating post-WWII politics, but I would be degressing far too much.
    Suffice to say if M5S rules Italy, it’s all over for the EU, not so much because they would be modern day Jacobins but because it wouldn’t be the end of civilization. Not even Stalin and Mao managed that.

    • chip Javert says:

      Well, at least they have great food…

    • Corsomagenta says:

      I’ve lived in Italy for 20+ years. You observations are spot on! Well done.

      What a tragedy this country is. So much potential down the drain of nepotism and corruption (and EU/central bank officiousness). The irony is that, at a structural level, Italy’s economy is remarkably well diversified (manufacturing, agriculture, tourism). These people have all they need to build a secure, prosperous and self-reliant society. But they have total idiots ruling the land.

  5. IIUC what we are seeing is another “mass extinction” event comparable to what happened when the last ice age ended, and the environment changed.

    There appears to be no good solutions at this point, merely the selection of the “least bad” alternative, and this will largely depend on the priorities, goals and objectives. What is clear is that “business as usual” is not a viable option in the medium to long term, even with basically unlimited taxpayer support.

    The clubby, TBTF domestic banks/financial institutions are going the way of the wooly mammoth and the giant ground sloth in the new socioeconomic/cultural environment of globalization and supranational corporations. It is entirely unreasonable for the these organizations to assume they were somehow exempt or isolated from the socioeconomic havoc occurring around them, which in many cases they had enabled/abetted. It should be noted that Italy is not unique, only first.

  6. GSX says:

    Trump will save them as he did himself 4 times via BANKRUPTCY LOL

  7. Ross says:

    Why don’t they make Italy give up some of their 2400 + tons of gold? Ukraine was forced to give theirs up and now Venezuela is being forced to also.

    After all, gold has no value anyway. Hmm, but it is still better than a paper promise.

    Italy supposedly has the fourth largest gold reserves.

  8. pvt mushroom says:

    Don’t seem to be many open gold audits.

    That says it all !

  9. frederick says:

    İtaly should be fine My wives family lives there and everybody they know does very well Lifestyle is MUCH better than in the states to be honest but they are in the North central region of Arezzo which is wealthier than most

    • JerryBear says:

      Southern Italy is very much a different country with different languages. The North does not have much sympathy for the backward, superstitious, impoverished Mafia ridden South and wouldn’t mind at all if they split off. You can find real 3rd World poverty there.

  10. Gregg Armstrong says:

    Naming JP Morgan as the most corrupt bank is sort of like standing around the pigpen and trying to single out the dirtiest pig.

  11. r cohn says:

    Applying John Bulushi’s speech from “Animal House”


    Italy -DEAD

    If these countries left the Eurozone ,their bonds would collapse and their new currencies would reflect their financial condition.
    Given the ECB”s imprimatur ,Germany will be pulled towards approving a relaxation of the rules determining how many sovereign bonds the ECB is allowed buy. Then the ECB can just print more money out of thin air to back up the debts of these three bankrupt countries. NO PROBLEM ,CRISIS IS OVER

  12. Hugo says:

    I really do not get this at all. The ECB is desperate to even further lower the exchange rate of the Euro. They already print 80 billion Euro a month. Print 400 more and get over with it. Everyone knows the Euro (and all other fiat currencies) are a joke and are printed in huge quantities. Political and banking theater of the highest level, thats all I can make of this farce.

    Regards, Hugo

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