Things could get very ugly, very fast, if those bank bonds collapse.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Project Fear began two years ago in the run up to Scotland’s national referendum. It then spread to the rest of the UK in the lead up to this summer´s Brexit referendum. But it keeps on moving. Its latest destination is Italy, where the campaign to instill fear and trepidation in the hearts and souls of Italy’s voters was just inaugurated by the world’s most influential investment bank, Goldman Sachs.
It just released a 14-page report warning about the potentially dire consequences of a “no” vote in Italy’s upcoming referendum on the government’s proposed constitutional reforms. The reforms seek, among other things, to streamline Italy’s government process by dramatically restricting the powers of the senate, a major source of political gridlock, while also handing more power to the executive.
The polls in Italy are currently neck and neck, though the momentum belongs to the reform bill’s opponents.
If the Italian public vote against the bill, the response of the markets could be extremely negative, warns Goldman, putting in jeopardy the latest attempt to rescue Italy’s third largest and most insolvent bank, Monte dei Paschi di Siena. The rescue is being led by JP Morgan Chase and Italian lender Mediobanca, and includes the participation of a select group of global megabanks that are desperate to prevent contagion spreading from Italy’s banking system to other European markets, and beyond. They include Goldman Sachs [Big European Banks Try to Block Contagion from Italian Banking Crisis (Before it Sinks them)].
In the event of a “no” vote, MPS’ planned €5 billion capital increase would have to be put on ice, while investors wait for the political uncertainty to clear before pledging further funds. This being Italy, the wait could be interminable and the delay fatal for Monte dei Paschi and other Italian banks, Goldman warns. It also points out that Italy is the only European country where a substantial portion of its bank bonds are held in household portfolios (about 40% according to data from Moody’s, four times more than Germany and eight times more than France and Spain).
In other words, things could get very ugly, very fast, if those bank bonds collapse! As for Italian government bonds and Europe’s broader debt markets, they would be insulated from any fallout by former Goldmanite Mario Draghi’s bond binge buying.
Goldman’s report has one main purpose: intimidating Italy’s electorate into following the government — and EU — line. Failure to do so would be tantamount to economic suicide, since it would trigger the collapse of the banking system and the mass destruction of billions of euros of Italian household wealth.
That may well be what happens in the end, but it won’t be due to the voting preferences of Italy’s electorate, whatever Goldman may claim. After all, it’s not like investors are not already perfectly aware of the chronic weaknesses of Italian banks. Italian banking shares have crashed. Just as ominous, the Bank of Italy’s liabilities towards other Eurozone central banks rose to a record high of 326.95 billion euros in August, above levels not seen since the height of the euro sovereign debt crisis four years ago.
In other words, investors and depositors — both foreign and domestic — appear to be voting with their feet.
You can hardly blame them! Monte dei Paschi has needed two bailouts just to make it this far, and it’s still the weakest lender in Europe, according to the ECB’s latest stress tests, and needs a third bailout. To make matters worse, its CEO just stood down following allegations of false accounting and market manipulation. Since the announcement of the latest rescue attempt, MPS’s penny-stock continues to languish in the €o.23-€0.26 range, just over one-tenth of its value a year ago. It’s hardly what you’d call confidence-inspiring!
Failure to pass the reforms in October may end up exacerbating an already impossible situation, especially if Italian premier Matteo Renzi chooses to resign, as he said he would when he called the referendum, though he has since backtracked. The biggest beneficiary of a no-vote would be the increasingly popular euro-skeptic Five-Star Movement, which has promised to hold a non-binding referendum on membership of the euro if it wins the next elections — a nightmare scenario for both Brussels and Goldman Sachs.
Whether the reforms pass or not, the chances are that a very large Troika-funded bailout will be needed to stabilize Italy’s banking system, as La Stampa suggested on Monday.
In the meantime, Goldman Sachs, a bank whose alumni include two former Italian prime ministers (Romani Prodi and the Troika-imposed Mario Monti) and a former governor of the Bank of Italy and current president of the ECB (Mario Draghi), will continue to sow the seeds of fear. It will also use all the useful contacts it can glean from the address books of former European Commission President and recent Goldman recruit Manual Barroso to gain even more leverage over European policy making.
But as Brexit has shown, fear and top-down control are not always enough to inspire allegiance or impose obedience in a semi-functioning democracy, especially when the chips are down and a majority of the people are losing faith in an economic and political system that abandoned them long ago. By Don Quijones, Raging Bull-Shit.
The Italian Banking Crisis would complete Europe’s “Doom Loop.” Read… The Impossible Italian Job
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
You are castigating GS for their 14 page report, yet you appear to agree with the risks of a “no” vote.
Italy is cluttered with corrupt politicians and bankers, plus a population that seems to have cared less about all this since the end of WW2, as long as they get something for free (pensions, etc).
What am I missing?
I think DQ is castigating Goldman for trying to influence/manipulate the vote.
Sounds like the US. I don’t see any diff.
You neglected to mention the exceedingly corrupt banking gangsters at Goldman Sachs who couldn’t care less about anyone or anything excepting themselves and their bonuses fueled by crime and corruption. They would not give one cent to save Italy. They are only interested in how much in fees, frauds, theft and swindles they can extract from the Italian People, the Italian government and whomever else they can get their hooks into. I’d prefer the corrupt Italian Senate any day of the week and twice on Sunday’s over the criminal banking gangsters at Goldman Sachs.
Goldman = Government
If all that you say about Goldman is true then Goldman should be prosecuted. However, I doubt what you charge is true. It’s easy to rattle off charges; it’s more difficult to prove them in a court of law.
Of course Goldman wouldn’t give one cent to save Italy (I certainly wouldn’t, and I strongly doubt you have either).
Regarding your preference for the corrupt Italian senators vs Goldman, that’s what’s in power now, so you have your wish. How’s that working out for the 60M people in Italy? Not so good?
Come on Chip – what are you 12? Plenty of fines payed by Goldman, they just get preferential treatment and don’t have to go to court.
Right on Gregg. Look what they did to Greece.
If I have this right; if the bonds go the banks go and not just in Italy or even just in Europe.. This seems like a close run thing and if the worst happens in Italy the worst will happen here.. Pay down your debts..
Goldman …. Government: one in the same. Changing labels does not change the function
Well, actually labels do matter. Goldman as a publically-owned company was HIRED by the government of Italy.
I’m not necessarily defending Goldman, but I am questioning a mindless attack on the relationship. Only you get to express opinions?
These are not difficult concepts to understand.
Banking is obviously big business, the biggest and influential. Therefore power comes into play, market share, manipulation, and greed. And, when caught, a fine they pay. No problem, it’s the way, and no ranking executive goes to jail. What a tale.
“I saved all of the Time, Newsweek, Economist, and US News and World Report in the weeks leading up to the Sept 2008 crash and in not one was there a hint of a coming collapse. Afterward all said it was so obvious even the blind could see it coming but even Krugman was caught flatfooted and has spent the last 8 years obfuscating that fact.” This is starting to feel close..
The Economist did report on the housing bubble in August 2006 (second Thursday of the month’s issue if I recall), and it was this: On 1 January 2001, the total aggregate home value in the US was $14 trillion, and five years later, on 1 January 2006 that number had reached $23 trillion.
Yet, during the next two years there was not much warming of what would happen. I agree with you David, this is starting to feel close again.
Hi Dan: There were warnings about bubbles for years with Krugman saying he was worried which I think was his strongest warning of trouble but few saw an actual collapse coming.. I’m not a fan of Peter Schiff but he did warn repeatedly until he sounded like Casandra and was ridiculed on CNBC which makes some fun watching on YouTube.
I’m happy to read that the common American has at least tried to reduce their household debt (I guess that has spiked up) because they learned the lesson that they won’t be bailed.. All of the ones with any abilities and connections to getting cheap Fed money are now on the wrong side of it..
Economics is not a science – it is an observational activity wrapped in statistics.
Anybody who expects economists to accurately predict things like the crash of 2008-9 are whistling in the dark.
Don’t believe me? Go ask an economist to identify major bubbles in the USA economy, and tell how far they will drop and when. Every howling mad loon in the country will claim to have an “expert” opinion.
Yawn. Either way, Draghi will print tons of money. Heck they might even come with a slice of Tiramisu for each Italian citizen.
The big banks are fearful.
They are now utilizing their own fear.
In recent months LIBOR has increased to levels last seen in 2009.
Goldman Sachs fully realize that an increase in LIBOR generally means tighter credit conditions and since rates have been kept so low, higher LIBOR rates will raise bank borrowing costs.
Therefore they and their backing banking cabal are pushing hard for this Italian deal to go through, using the instill fear tactic to speed things up.
As an aside, the FED fully knows the LIBOR situation and is pulling out all the ‘jawboning’ tactics to calm markets ahead of their upcoming September meeting. There will be no rate increase. The FED realizes that it would be financial suicide.
Is not the FED part and parcel with the cartel bent on vacuuming up wealth? Low rates help them herd sheep into the sheering sheds.
Well, they just need to route the scheme through the libor manipulation machine….. now let me think……. which pair of banks was that……
no… it’ll come to me…….
let it crash and burn…..
A Higher Level of Insanity
PIK Toggle Bonds (PIK = payment in kind)
These bonds are sold at arms length. eg. A corporation generates a bond, that is then issued (sold) through it’s holding company. Ensuring a layer of corporate insulation.
These bonds allow interest payment deferrals and also allow coupon payments to be made with more debt.
Buying bonds that allow interest to be paid back with still more bonds!!! Utter. Complete. Insanity.
God help us if the people are allowed to vote!
Are we not getting tired of these idiots telling us what to do, while they steal our money.
This could end with pitchforks and lamp posts featuring!
“This could end up with pitchforks and lampposts…”
Hopefully it will, featuring the banking gangsters, as starring attractions, hanging from lampposts everywhere.
We cannot change where we are, nor where we are going. If you were in that position you would either “join the club” and receive all the benefits of membership, or meet your demise.
We are all along just for the ride
With attitudes like that, you are correct.
Which brings us to the statement: The only thing necessary for the triumph of evil is that good men should do nothing
It always does gkaiser when they get too carried away and people finally get fed up Look at history for lots of precedant
This SHOULD end with pitchforks and lamp posts.
There, fixed it for ya ;)
I don’t know enough about the financial stuff to add anything, but overall , it would be a step in the right direction if Italy could at least be made governable. This means much the same that it means in a company- no one wants to invest in a company were no one can make
By a huge margin Italy has had the highest number of governments since WWII, at times one a year. By the time a government analyzes a problem, they’re gone.
No matter what problems a country faces, they aren’t going to be addressed by an impotent executive, or a ‘pizza parliament’ -one with many parties.
I know a guy with an Italian wife and when I was mentioning the terrible condition of the Italian banks, he replied that: “Italy is always in crisis, but always keeps going”
There is something to this, in the sense that modern technology pretty much makes sure we’re fed, have water etc. In earlier times a bad harvest meant starvation, and the Irish potato famine of the mid 1800’s is not ancient history.
But the idea that the can can always be kicked down the road may be about to meet an obstacle in the road, a mountain of cans.
Thank you Nick Kelly. Socialist policies always lead to economic crisis. Italy was the #1 european country always on the verge of going communist during the cold war. they always got just enough socialism (free stuff) to keep them in the “fold” NATO. Same goes with Greece. Economic problems are always preceded by political policies.
Most Southern European nations are corrupt from top to bottom.
The free stuff must be handed out at the bottom for them to put up with the corruption at the top.
Those at the top like things the way they are and this is the price they must pay to keep it that way.
The corrupt at the top in the US haven’t been giving enough free stuff away to those the bottom and they now face being swept away.
Little report from the ground.
The big problem is this referendum will very likely not meet the minimum numbers to be valid. Apart from deep disinterest among people on the ground due to past experiences, most organizations, such as many trade unions, have already declared they won’t issue any guidelines for their members and leave “liberty of conscience”.
The reasons are two.
First, the referendum text has been written in obscure and labyrynthine language (“burocratese”) and Italians have learned to have a deep distrust of anything written in such a language.
Second, even unions, many of which support the present government, mostly made up of former (?) Communists, recognize this referendum is nothing more than a power grab by the present executive wich is really nothing more than a continuation of Mr Monti’s, possibly the worst government Italy has ever had… unless you happened to be a bank, a housing magnate or a “charity”. ;-)
If there’s a “Project Fear” ongoing, however, it’s aimed at M5S which conquered Rome earlier this year. The new major, 37 years old Virginia Raggi, has been the subject of a smear campaign which makes the ones usually accompanying US presidential elections look like the work of a charitable nuns.
What crimes has this woman committed to warrant such treatment? Apart from belonging to a party that sends the media into frothing at the mouth fits of rage, she has opposed from moment one the plan of hosting the 2024 Olympics in Rome.
In my opinion that alone warrants she won’t get to eat the Christmas cake: the same people, big and small (corrupt cronies aren’t just oligarchs), who feasted at the trough of EXPO 2015 want those Olympics so badly they can almost taste them. In spite of Draghi’s bond buying binge, big public work projects have dried up in Italy until the recent earthquake which hit the Marche.
The Olympics must be held in Rome and a “protest” political party won’t be allowed to stand in the way.
In the EU the elite always asks the population of turkeys to vote for Christmas.
Unless it’s too ‘important’ – like the Euro that has laid waste southern Europe, or people may get the wrong answer – like the Lisbon Treaty with was the EU constitution, which has seen the EU gain huge amounts of power with the corresponding dive in living standards that accompanies such power grabs.
The big surprise was Brexit – who’d have thought the UK would be allowed to vote out?!?!
Why are Club-Med banks in trouble?
I suppose we should start by looking at the bleedin’ obvious.
The EU technocrat’s intellectual superiority means they tend to over-look things that are bleedin’ obvious to lesser beings.
When you impose austerity it leaves people lower down the scale with less money and because they have less money they are no longer able to make their loan repayments leading to NPLs.
Those lower down the scale have less money to purchase goods and services, leading to problems with the companies they used to buy goods and services from. These companies then have less money and are no longer able to make their loan repayments.
These companies in turn bought their goods from other companies, leading to problems with these companies they used to buy goods from.
These companies then have less money and are no longer able to make their loan repayments.
The banking systems of all Club-med nations are in trouble.
EU technocrats can you work out what you have done to cause the problem?
The IMF and World Bank have been destroying economies for 50 years with austerity.
It has left a trail of wreckage through South America, Africa, Asia, Eastern Europe and has now arrived in Western Europe.
No one told the EU technocrats.
The whole European Union scheme reminds me of the “confederation of states” set up the U.S. had after the American Revolution, and prior to the constitution. That is roughly 1783 to 1791. Within 8yrs the brilliant American founders fixed the situation. Europe has been trying for decades and centuries. The only difference I can see in the societies was at the time America was homogenious (90% anglo protestant). I don’t think the American Constitution could be approved in America today. Afterall the founders said “It was meant for a moral & religious society, It would not work for any others”. This is why “Americanism” could not be transferred to places like Vietnam and Iraq, or even Russia. And now it is not even working in america !!! much less europe. I think the days of NATO, and possibly even the UN are up for question now among this current generation of “immoral” and “irreligious” americans and europeans.
You may know better about the US.
As far as I know the US states redistribute the surplus from the richer states to the poorer states to stop them from going under.
Current thinking says that everything will reach stable equilibriums.
Personally, I think it polarises and dies from lack of demand.
Greece has already died.
You can hide it with debt for a while to keep consumption going until you reach peak debt. as Greece did and many Western consumers have.
Debt just hides the problems till later making them worse as you go along.
Graham – Who said the UK has left? I heard it was leaving.
The UK is still in the club, hell, the UK helped build the place. At the moment it’s just causing mass panic worldwide and showing everyone what a terribly stupid idea it is to go and decide things by itself, silly sovereign nation. Mass reforms will be pushed through at an alarming rate without the UK mucking up the process using that dreaded common sense and VETO powers. Article 50 will be mulled over, used when desired as a EU 9/11-esque buzzword and then eventually it will be decided that since it was so close either another referendum is needed or it was never legal in the first place or the economics are so dire it needs to be indefinitely postponed. Call me a cynic, conspiracy theorist, whatever you like but I don’t believe for a second that any democratic process with so much at stake will ever be democratic, just look at the USA and pick your own favourite rigged election. Was freedom always this constraining? I have a deep respect for Poland, UK’s long time co-conspirator at reason in the councils who immediately shut down any plan of retaliation by EU against UK. Poland is now facing massive funding cuts by EU unless it gets with the program, shuts up and obeys better like taking more refugees. Of course they’ll still be expected to pay some 8-9 billion euros a year. Death and taxes, no good deed.. Why would the Brits even think of leaving this super best friends club? The powers that be will give the Italians a vote?