The Impossible Italian Job

The Italian Banking Crisis would complete Europe’s “Doom Loop.”

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

Italy’s repeated attempts to stave off a full-blown financial crisis and breathe life back into its moribund banking sector can be summed up in four words: too little, too late.

In April, it set up a bad bank vehicle called Atlante that was expected to bail out the country’s most troubled lenders as well as allay growing fears of a systemic crisis within the financial sector. With just €5 billion of funds to its name, it did neither.

Cue Plan B, which saw the EU in June grant permission for Italy to use “government guarantees” to create a “precautionary liquidity support program for their banks worth €150 billion. On the surface it seemed like a lot more money, but in the end it amounted to little more than a PR stunt. The stampede out of Italian banks barely missed a beat [As Fears of “Bank Run” Escalate, Italian Banks Get €150 Billion Bailout of Empty Promises].

Finally, at the end of July things got seriously serious with the unveiling of Plan C: a third, much larger rescue deal for Italy’s chronically dependent and third largest bank, Monte dei Paschi. The deal involves a consortium of banks, led by JP Morgan, and in a secondary role, Italian investment bank Mediobanca, which will apparently help Monte dei Paschi raise €5 billion in new capital and sell €9.2 billion in bad loans at a deep discount to get them off its books.

As we reported, the underwriting fees are going to be extraordinarily juicy, in particular for JP Morgan. For Monte dei Paschi, meanwhile, the impact could be somewhat more muted, especially given the immense difficulties it’s likely to face offloading close to €10 billion worth of putrefying debt that nobody wants to touch, as The Economist points out:

As the Distressed-debt investors tend to buy loans in bulk, and hence prefer loans with easily recoverable, tangible collateral. The NPLs of stricken British, Irish and Spanish banks in recent years were largely mortgages: being backed by property, they could be valued from current real-estate prices. British and Irish courts are also pretty efficient at dealing with claims on collateral. Many Italian NPLs, by contrast, are uncollateralised loans to small businesses or consumers. Even when collateral has been pledged, Italian courts are much slower than those elsewhere to recover it.

This may help explain why since the announcement of its latest “rescue” on August 5, MPS’ stock – reduced to a penny stock long ago – has plunged a further 8%, from €0.25 to €0.23.

If investors do not believe that even JP Morgan Chase, with the help of an all-star cast of global systemically important, precariously interconnected financial institutions, can sanitize a fraction of the bad debt putrefying on the balance sheets of the country’s third biggest bank, then Italy — and by extension, the Eurozone — may have even bigger problems than previously thought. After all, Italy accounts for roughly one third of the Eurozone’s estimated €1 trillion worth of non-performing loans.

But that hasn’t stopped its banks from continuing to extend dirt-cheap credit to loss-making companies. Perpetual loss-makers such as fashion retailer Benetton and Feltrinelli, one of the country’s largest booksellers, continue to receive ridiculously low-interest loans — all made possible, of course, by the liquidity glut conjured into existence by ECB Chairman Mario Draghi’s negative interest rate policy (NIRP).

As happened in Japan at the beginning of its so-called lost decade, which to all intents and purposes continues to this day almost 30 years later, instead of biting the bullet and booking losses, large banks in Italy have kept credit lines open to borrowers even when it was clear they had no chance of honoring their obligations.

Where Italy differs from Japan is that it is already well into its second lost decade and the sheer scale of its problems are only just beginning to emerge, having been masterfully masked by an epic expansion of bad debt, which jumped from 5% of banking assets in 2008 (5% being the threshold for sound banking) to almost 20% today.

Yet despite — or perhaps because of — the unconditional generosity of Italian banks to Italian firms, the country’s economy continues to stutter. It is smaller today than it was in 2008 and not much larger than in 2000. And according to Enrico Colombatto, a professor of economics at Turin University, the future holds even grimmer prospects:

Growth continues to disappoint and the estimates for 2017 have recently been cut, unemployment is relatively high, investment is stagnant and companies keep going belly up. Furthermore, Italian treasury bonds would be worth much less than their present price if the markets did not believe that, should the need arise, the European Central Bank would step in and bail out the Italian government.

That is precisely what the ECB and the European Commission will end up doing. The alternative is beyond unthinkable: Not only would it mean allowing bank bondholders — including very large foreign banks and hundreds of thousands of Italy small savers — to take a massive hit, potentially sparking a run on bank deposits; it would also trigger the final dreaded phase of Europe’s so-called doom loop.

If Italian banks began falling like flies, it would only be a matter of time before investors began selling (or shorting) Italian bonds en masse, by which point the Doom Loop would be in full flow. The more the bond prices fell, the more impaired the banks’ balance sheets would become since they hold a big chunk of these bonds. And it would speed up the stampede out of Italian bonds and banking shares. Rinse and repeat, until all that’s left is a smoldering husk of a banking system.

The contagion effect would quickly spread beyond Italian shores. The total exposure of French banks to Italian debt exceeds €250 billion. That’s triple the amount of exposure of the second most exposed European nation, Germany, whose banks hold €83.2 billion worth of Italian bonds. Deutsche bank alone has over €11.76 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). By Don Quijones, Raging Bull-Shit.

Which is why, despite principled opposition from certain quarters, the monetary equivalent of the kitchen sink will end up being thrown at Italy’s banking crisis. In all likelihood, it too will be too little, too late.

These big banks have every reason to try keeping Italian banks afloat. Read…  Big European Banks Try to Block Contagion from Italian Banking Crisis (Before it Sinks them)

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  31 comments for “The Impossible Italian Job

  1. nick kelly says:

    The key takeaway- ‘being backed by property, they could be valued from current real-estate prices. British and Irish courts are also pretty efficient at dealing with claims on collateral.’
    While Italian loans are often have lousy collateral, even getting that is difficult/impossible. But collateral is the essence of a commercial loan.

    It’s not neo-lib or neo-con or greedy Goldman. Like the poor the greedy are always with us; Goldy is no less greedy in the UK

    At its roots it is dis-functional governance.

    PS: the quote includes Spanish property loans in the virtuous circle. From what I’ve read this is not the case, with a million plus unoccupied units on books at the inflated prices of 2008. There has never been a mark- to- market.

  2. Chip Javert says:

    As a retired CFO I read these numbers and just cringe. Don Quijones mentions 5% NPL as the upper threshold for sound banking (agreed). Bank regulators in the USA generally shut down (resolve) banks with NPL near 10%; continuing to operate at 20% is simply difficult to imagine – where do they get the cash flow?

    Looks like Italy & Spain are getting to the head of the line where countries begin to understand that, without helicopter money, they are just as poor as Greece.

    Mama, don’t let your babies grow up to be socialists…(apologies to Willie & Waylon).

  3. ” … uncollateralised loans to small businesses or consumers. Even when collateral has been pledged, Italian courts are much slower than those elsewhere to recover it.”

    Because the loans are often made to small businesses (mafia-operated shells) or consumers (mafia members or clients). Even the big companies have ‘ghosts’ who require a cut of every loan taken … The mafias do help companies to gain the loans; in a sense they are offering brokerage services … but the intent is never to repay.

    To the Italians, the (Franco-German) banks are no different from the Nazi invaders or the Normans, Saracens, French, Spanish, Lombards, etc. before them. It is fair game (patriotic duty) for Italians to pillage them.

    And what have the banks done for Italy? They have driven the cost of housing above the ability of wages to pay, they finance the export of Italian jobs. Who finances Europe’s wars and why? The Italians understand, they are not stupid.

    The prospect of the land of Michelangelo and Machiavelli becoming that of Paul Singer … unlikely.

    • chip Javert says:

      steve from virginia

      Nazi’s didn’t invade Italy in WW2 – Italy & Germany were allies, at least until America & Britons invaded Italy – it promptly quit the war. Turns out the Italian army wasn’t very good at fighting anybody who could fight back (also got their butts kicked in North Africa).

      You may have heard of their dictator Benito Mussolini, who was eventually hung out to dry (so to speak).

      • nick kelly says:

        Goddammit Chip, are we going to have to divide the contra- territory?
        In the words of Canada’s first PM, Sir John A McDonald, “there isn’t room for two drunks in this House”
        Or maybe it was ‘party’

        PS- I had just resolved to more polite to posters when this guy popped up.
        Jesus wept.

  4. nick kelly says:

    ‘To the Italians the Franco- German banks are no different than the Nazi invaders or the …French.’
    So the Italians, while dutifully pillaging these foreign banks, dutifully repay the Italian banks?

    Moving on, Fascism arose in Italy before Germany. At first begging off from WWII, in spite of the Pact of Steel alliance with Germany, Italy finally invaded France just as she was about to fall- causing Hitler to remark that ‘Mussolini evidently thinks that this a walk in a passo Romano’
    Then much to the surprise of Germany, Italy invaded Greece. They quickly stalled, requiring German assistance.

    ‘Who finances Europe’s wars and why?’

    For someone who doesn’t like Nazi’s, you are borrowing from their playbook. Jewish interests. e.g, the Rothschilds have always been big in finance and beginning in the 1400 hundreds, helped develop banking.
    Just like today, the sovereign loan, a loan to a country was desirable.
    But what was the main reason sovereigns i.e., kings needed money- to wage war.
    At the time that Britain was fighting Napoleon in Spain the Prime Minister wrote: ‘The man Rothschild, although a jew, has been of much use”
    But we have seen how quickly the borrower blames the lender.
    For the Nazi’s- the loans made to finance wars caused the wars.

    So why did the Rothschilds make loans to kings: for the interest.

    • Graham says:

      As an interesting observation, a private central bank issuing currency is essentially a usury machine setting up a debt spiral. The victim/subject is also effectively renting their funny money.

      This happens because of the interest, even at the lowest rate the interest is a problem because only the capital is issued, so that 1 or 2% needs to be borrowed too – like paying your mortgage each month by borrowing the interest from the bank.

      The result is known in mathematics as the ‘exponential function’ because with interest of N% over Y years the sum owing is 1.0N^Y, which explains why all of the countries debt curves accurately follow the exponential curve.

      Of course additional loans – wars etc – speed up the process, the process being the transfer of wealth from the subject to the central bank, the central bank ending up owning everything – all for the privilege of renting the money they create from nothing.

      For this reason the constitution mandates the treasury to print the notes – like Abraham Lincoln’s greenbacks, and like JFK had printed up all ready to roll. This was undone in 1913, the day the US stepped into the debt spiral.

      BTW this is why gold standards never work for long – you can’t dig up gold at an exponential rate, only at a linear rate.

    • d says:

      “So why did the Rothschilds make loans to kings: for the interest.”


      “So why did the Rothschilds make loans to kings: Because the kings held a sword to the throat’s of Rothschilds Women and Children, and snarled “GIVE ME MONEY JEW”. Before expelling the Jew’s from the country, so they did not have to repay them”

      As was and regularly done in Europe up until 1940, then in the greater ME until the 1960’s, and is still being done to Jew’s in some places today.

      Plenty of bankers who are not Jew’s. Lend to corrupt warmonger sovereign’s and make profit.

      Yet only Jew’s are ever castigated for it.

      • nick kelly says:

        When British PM Pitt used Rothschild to finance the war with Napoleon, no Rothschilds were held captive or threatened by him.

        • d says:

          “When British PM Pitt used Rothschild to finance the war with Napoleon, no Rothschilds were held captive or threatened by him.”

          NOT SO.

          The message from Pitt was simply. “Give it, or we pass an act of Parliament, and take it”. “Further we will lock you out of the financing of all other major projects unless you do as instructed in silence”

          Just as it always has been in England and Europe. “Give and you may get it back in a few century’s, if we fell like it, or we will take it and you will get nothing back”.

  5. Humpty Dumpty says:

    A vast, incompetent, socialist European population finds itself nullified, supine, and headed for a rendezvous with civil suicide facilitated by an elite class that is a cannibal. McLuhan predicted civilization would become tribal and reduce itself to sticks and spears. Seems we’re getting there on the quick.

    • Chip Javert says:

      Well, ever since the USA joined WW2 in continental Europe, these folks have become used to other people dying for, feeding, defending and financing them.

      After 70 years, all you know how to do is make a great cup of la dolce vita and spend other people’s money. It is beautiful country.

  6. john Doyle says:

    Joe Stiglitz has an idea for the euro, but it’s flaws are pointed out in this blog by Rodger Mitchell. The only way out for these banking crises is to return monetary sovereignty to each member state;

    • nick kelly says:

      I read your comment and thought: ‘an idea for the euro is to return monetary sovereignty to member states’ is a contradiction in terms.
      Monetary Sovereignty MEANS you have your own currency.

      But them I read the link and sure enough Roger Mitchell says roughly. ‘Apparently Stiglitz doesn’t realize that letting each state have its own euro is the same as each having their own currency’
      Which sounds so obviously true that either Stiglitz has gone ga ga or he means something else.
      Does DQ have any thoughts?

  7. micromacroman says:

    The only way europe could afford their high dollar socialist states. Is because they had VERY low defense spending in their budgets. That is why they got the month vacations. The gold plated health care plans. Age 55 retirement. Cause the U.S. through NATO has been paying for 80% of their defense budget. This has been a subsidy, but at the price of an occupying foreign army. The U.S. can no longer afford this. It is time for the europeans to deal with Russia, China, terrorism on their own. America would do well to “retreat” to our own borders. And let the worlds “moral” situation play out on its own. Just like we did after WWI. War is comming. Let these foreign socialists choose up their own sides, do what they will. It is best the U.S. just sit back from the middle east, and asia and see what happens. Even if it means a recession/depression. Let the fools fight it out like before. Then move in once the moral basis has been clearly defined…..Instead of dictating the the moral situation–a foreign policy we are no longer qualified to decide.

    • Chip Javert says:

      Even with ultra-low defense spending and depending on others to do their fighting for them, the EU can’t afford their lifestyle.

      Most of them pretty much went bust in WW1, which was just made worse by WW2. The Marshall plan was about all that held non-communist Europe together – it literally prevented massive European starvation after WW2.

    • Islander says:

      What’s wrong with low defense spending?? It should be seen as a virtue, not a ‘shirking of responsibility’. It’s not like major war looks possible anymore, what with nukes. And anyways there are many successful countries who dont require large standing armies to have sound economies, and even more poor countries with gigantic military apparatuses (n Korea etc).

      And while I’m on the subject, have you ever considered that the US military is as close to socialist heaven as it gets? Ultimate Job security, comprehensive benefit system, organized along a no profit philosophy etc. Bush tried to inject some “capitalism” in there; it was a huge failure.

      • Chip Javert says:


        “…It’s not like major war looks possible anymore…”: Guess you missed Vietnam, Iraq, Afghanistan, Rwanda, Syria (plus others) representing a few million war dead.

        “… US military is as close to socialist heaven as it gets…”: guess you missed the killing & getting killed part.

        You win the Neville Chamberlain award

        • Wolf Richter says:

          I think Islander’s idea of “major war” is on the scale of a WW – including these days, a nuclear exchange.

          There will always be wars of the current size (Iraq, etc.). They can be managed, and stocks go up, and they produce tons of wealth for the military-industrial-intelligence complex without risking the lives of the executives, think-tank honchos, lobbyists, and consultants.

          But a “major war” (WW3) could spiral out of control. With nukes all around, no executive or lobbyist in their right mind wants to get anywhere near that, because they themselves, ensconced in their luxury home in LA or DC, could die.

        • Chip Javert says:


          Millions who continued to die in 20th/21st century conventional wars are just as dead as if they were killed in a nuclear WW – they also deserved protection. A society that can’t protect citizens won’t remain viable for very long.

          Generally speaking, delicate flowers like Islander are not on the front line defending defenseless civilian men, women and children (say, like in Syria).

          Low military spending is a warm & fuzzy concept, but it flies in the face of history and human nature. “Make Love, not war” works great right up until you meet somebody with a gun who thinks he can do both, plus take your money and enslaving you (case in point: ISIS).

          Just because the vast majority want peace does not prevent a tiny minority from causing otherwise.

  8. Al Tinfoil says:

    European banks just need more Extending and Pretending.

    All will be well. Just ask Draghi, Juncker & Co., and Merkel. The ECB will never run out of 1’s and 0’s.

    As long as they keep the fire hose running, more EU members do not take the exit, and the World continues to accept fiat currencies.

  9. d'Cynic says:

    Perhaps time has come for plan D: Italian state taking stakes in it’s banks. I can imagine the caricature in some financial paper: two cripples walking on crutches propping each other up. Such picture could have invited ridicule in the old days, but today with so many sick, it could invite sympathy.

    • Chip Javert says:

      Let’s see: Italy buys the banks, which are worth somewhere between nothing and a whole lot less than nothing.

      Yea; what could possibly go wrong?

  10. Copernicus says:

    The unwillingness of the Germans to let Europe grow is yielding substantial collateral damage. Germans seem to have a problem understanding the concept of collateral damage.

    • Chip Javert says:

      Germans understandably aren’t enthusiastic about letting Europe grow (I’d use the term: “continue to exist”) on the backs of German taxpayers…Germans also remember the Weimar Republic hyperflation: 1 Mark per loaf of bread to 1 billion Marks per loaf in about 4 years.

      Europe may indeed need capital to grow, but most importantly, Europe (ex Germany) needs something to sell. What do Italy, Spain, Greece produce that the rest of the world wants (other than tourism & olive oil)?

      Germany’s strategic mistake was entering into & remaining in a currency union with the rest of sad-sack free-ride Europe; probably not much wrong with the political union. If Germany left the euro, they’d need to alter the mix of who they sell to, but there obviously is demand for quality German product outside the EU.

      • Tim says:

        Germany loves the artificially low currency of the Euro – it is why they stay. They love running a trade surplus of 8% of GDP – in violation of the same rules they tout. Leaving the Euro would collapse their economy. I would love to see the trade deficit with a Deutsche Mark valued at 2.5 to the dollar.

        Consider this – Germany benefits immensely from a weak euro, and their banks get bailed out of their bad loans to Greece and the rest of southern Europe on the back of another countries taxpayers – not the Germans themselves. And they get to take the moral high ground. It must be wonderful but its mostly a sham.

    • d says:

      Perhaps as the Germans want real growth, not credit fueled consumption borrowed from the future.

      Which is what Draggi ECB/Euro policy’s, like Chinese policy’s are currently providing.

      Hence the current global economic stagnation, as over 40 years of future consumption has already been borrowed, by a declining affluent consumer base.

  11. david says:

    Just have Janet print up about $5 trillion in swaps and everything is bliss.

  12. NotSoSure says:

    If it is that bad, JP Morgan will not touch the thing even with a 10 foot pole. This is similar to all sorts of crisis that supposedly should be happening with Spanish, Mexican, etc, etc banks. Heck throw in a Spanish secession there.

    And yet, nothing has happened.

    People are still not getting the lessons from Greece, which is muppets will remain muppets. You can take muppets multiple times through the cleaner but as long as Game of Thrones or whatever passes for it in Europe is still playing, even a 100% youth unemployment will not matter.

    • Chip Javert says:

      JPM gets paid for performing a point-in-time transaction, not for healing a screwed-up EU bank. Of course JPM understands this silly exercise simply buys time for the bank’s managers to pretend to fix it. JPM will cash the very big check, go home and wait for the next pathetic call for help from Europe.

      Frankly, it’s hilarious to think of a rational investor putting $5B into Monte dei Paschi at the same time the bank is trying to off-load (i.e.: sell at a huge loss) $10B of non-performing debt. However, JPM will find an investor, and they will earn their obscene fee on this one.

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