Italy’s Banking System on Verge of Nervous Breakdown

The “Doom Loop” resurges.

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

One of the best indicators of whether a financial crisis is in full swing is when senior insiders begin to lose it in public. That’s precisely what happened in Italy on Thursday when Italian senior banker Giuseppe Guzzetti gave a speech at a conference in honor of World Savings Day, an international event that, unbeknownst to 99.9% of mankind, takes place every year on Halloween (Oct. 31).

During his address, Guzzetti admitted that Atlante II — one of two bad bank funds created to provide much-needed support to Italy’s crumbling banking sector (the other being its predecessor, Atlante I) — is chronically underfunded. The fund, set up in the spring to help Italy’s most fragile banks, in particular Monte dei Paschi, remove some of the most toxic debt off their balance sheets, has experienced six intense months of activity, “but is now out of breath,” Guzzetti lamented.

The admission is particularly important in light of Guzzetti’s current role, not only as the chairman of ACRI, an association of Italian savings banks and foundation, but also as the top man at Fondazione Cariplo, an influential “charitable” banking foundation. Cariplo is the largest shareholder of Quaestio Holding S.A whose deeply opaque Luxembourg-based subsidiary, Quaestio SGR, is the proud owner of Atlante I.

In other words, Guzzetti is as senior a banking insider as you’re likely to find. Presumably he knows just about everything there is to know about Atlante I and II. In fact, he helped create them. And now he’s deeply worried.

“The small number of contributions received so far threatens to seriously undermine the purpose for which Atlas was established: not only (or mostly) as a tool to manage some emergencies, but rather as an interventionary mechanism to create a true market for deteriorated credit.”

If any country needed a “true market” for deteriorated credit, it’s Italy, whose banks’ balance sheets are filled to the gills with around €360 billion of non-performing loans, many of them in an advanced state of decomposition and with very weak, if any remaining, collateral underpinning them.

To put that in perspective, that’s roughly a third of Europe’s entire stock of bad loans. As WOLF STREET warned a couple of weeks ago, the Atlante funds don’t have enough firepower to steady even Italy’s smallish regional banks, like Vento Banco, which keep coming back for more handouts, let alone the likes of Monte dei Paschi or Uncredit, each of which has tens of billions of euros of NPLs festering on their books.

Put simply, Atlante I and II are the financial equivalent of bringing a butter knife to a gun fight, as even Guzzetti all but admitted. “I had to give a bundle of billions to Atlante but there are two foreign banks in Italy — Credit Agricole and BNP Paribas — who have not done their part,” said Guzzetti, referring to two of the French banks most exposed to Italian debt.

The fund is still a billion euros short of its bare-minimum target of €3 billion. Things are apparently so dire that even Guzzetti, one of Atlante’s original creators, says he now regrets investing in the fund, presumably because most private sector operators refused to follow his lead.

Since its creation six months ago, almost all of the funds Atlante II has received have come from Italy’s government, via state-owned financial intermediaries such as CDP, the Italian Post Office and SGA, a state-owned “bad bank” dating to the collapse of the Banco di Napoli, which offered to put in €450 million. Most of that money will be used to buy up €1.6 billion of heavily discounted debt belonging to MPS, as JP Morgan Chase’s rescue plan to save MPS continues to flounder.

The move has done nothing to calm investors’ nerves. MPS’ shares had yet another torrid week, slumping 40% to €0.26 as markets reacted badly to management’s plans to sell off €28 billion in bad debts as well as cut 2,600 jobs. Of even greater concern is the specter of a resurgence of Italy’s “Doom Loop.”

As Holger Zschäpitz, senior editor of the financial desk at the German daily Welt, pointed out, Monte dei Paschi’s default probability (yellow, right scale) keeps trading in near-lockstep with Italy’s (purple, left scale):

Contagion is a particularly acute risk in the Eurozone due to the incestuous co-interdependence that now exists between sovereigns and their banks, thanks in large part to the ECB’s tireless efforts to underpin both Europe’s biggest banks (by providing them with an endless supply of virtually free money) with which they ended up going long Draghi’s “whatever it takes” pledge by buying Eurozone sovereign bonds.

Despite pressure from fiscally hawkish Eurozone countries such as Germany, the Netherlands, and Finland to put an end to the doom loop by removing the risk-free status of certain sovereign bonds, to the barely concealed horror of Italian and Spanish politicians and bankers, recent figures from Standard & Poor’s show that banks across the EU have continued to invest heavily in government debt, increasing their exposure to €791 billion. The total amount that international banks have lent to Italy is €550 billion, of which over €250 billion is sitting on the balance sheets of French banks.

And that is why a nervous breakdown in Italy’s banking system could have very serious consequences for the rest of Europe, if not for the world at large. It’s also the reason why, when push comes to shove, European authorities, with the ECB leading the way, will do whatever it takes to stop Italy’s banks from falling. But as the scope and scale of Italy’s problems continue to mushroom and confidence in the system continues to shrink, time is fast running out. By Don Quijones, Raging Bull-Shit.

So how can you make this Bad Debt Disappear? Read…  Italy’s Banking Crisis Gets Addressed: How to Conceal a Problem that Threatens to Engulf the Entire Eurozone

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  22 comments for “Italy’s Banking System on Verge of Nervous Breakdown

  1. Humpty Dumpty says:

    “European authorities, with the ECB leading the way, will do whatever it takes to stop Italy’s banks from falling.”

    Okay, like what? Print a bazillion Euros? Roll everything into govt bonds and roll those over and over and around forever and just who buys them? Oh bother, said Poo, we just need the honey pot back here. Or is this a remake of Duck Soup? Or, Mad,Mad,Mad,Mad,Mad World; oh, but I think it is, The Producers.

    • Tom Kauser says:

      Yield starved financial firms for pennies!
      Once dimon’s guys sanitize the balance sheet , the rotten fruit opens to a cornucopia of value.
      The hedge funds feast on the rock bottom prices and worries little about the public. Who was stupid enough to inject cash many times into the dead corpse?

  2. MC says:

    French banks know very well they’ll be bailed out by their own government and the ECB, no matter what the Germans say. That’s why Credit Agricole and BNP-Paribas can safely disregard this whole NPL fiasco.
    Back in 2010 French banks were exposed to Greece for €52 billion. By 2014 it had dwindled to about €2 billion, with the balance unloaded upon various European governments, chief among which were Italy and Spain.
    All of this was done without so much as a murmur from Berlin (perhaps because they were busy helping out their own banks) and a protest from Rome and Madrid, both of which found their balance sheets a bit heavier with financial toxic waste.

    Mr Guzzetti bemoaning the French banks’ unwillingness to “chip in” is surprising, as a man with his experience in the financial sector should know France is different and has enough political firepower to be immune from the usual Punch & Judy Show starring German politicians.

    • Copernicus says:

      MC is absolutely right!
      I noticed that French Bank move, switching debt at exactly the right time onto the shoulders of the state. That didn’t have to take the effect of written down Greek debt.
      It’s got to be one the biggest scams ever.
      I have never seen anyone else point it out.

  3. d says:

    Could the reason that others apart from the selfish french, wont contribute. Also be, that the fund’s are simply paying TO MUCH for the debts they are buying.

    If the fund makes no profit, Investor’s get no return. Investor’s have no interest. In creating another charity, for italian financial service’s office attendees, at the long suffering Investors expense

  4. Dan Romig says:

    in the words of Eddie Cochran:
    “After givin’ you a physical check
    I’ve come to the conclusion you’re a total wreck

    I’m a havin’ a nervous breakdown
    A mental shakedown”

  5. Petunia says:

    Just when I thought the financial system couldn’t get any more ridiculous, I discovered it can, the ECB has a video game. Want to blow up the Euro Zone, no problem, raise the interest rates to 25% and they will pretend the collapse of Europe came about as a flood.

    Maybe they are on to something. Let’s all pretend the world economy is a game and let’s play. It’s only money.

    • JM says:

      I think the debt is so hight now, raise the interest rate only 6% if enough for the collapse Euro financial system.

  6. Jungle Jim says:

    By the time this is over, we’ll all be Marxists. Not Karl, Groucho !

  7. Gil Obrero says:

    The fact the Lugenpresse will stomp all over any possible germ of truth emerging from the swamp over BNP, I am amazed that the alt press has not started digging.

    That bank is in worse shape than DB but covered up by the most incestuous corrupt relationship between Parisian elites

    The festering depths of rank theft fraud and corruption at that bank would turn hard men’s stomach’s when it finally comes to light.

    And yes, These Italian banks are going down, because nothing can save them short of thieving the entire savings of the entire country and the election will put paid to that along with the revolution that follows.

    And yes, BNP will finally be seen for it really is.

    The stinking cesspit of every depraved corrupt politician and banker and billionaire in France.

    If you have cash in BNP get it out now is my strongest advice.

    • walter map says:

      “The stinking cesspit of every depraved corrupt politician and banker and billionaire in France.”

      I smell opportunity. Go long on lavender futures.

      Honestly, just print the money, pay the debts, clear the books, skip the drama, and go en vacance.

      Problem solved.


  8. Chicken says:

    Doom Loop -> DOOP (Democratic Order Of Planets)

  9. Tom Kauser says:

    Shoring the bulkhead while the compartment is half full off water.
    The ship still goes down but the cargo is salvageable.
    If you are willing to buy the bonds (sight unseen)for pennies on the dollar?
    Halloween horror- free assets inside a dead and bloated host?

  10. Maximus Minimus says:

    Celebrating World Savings Day by opening a savings account and putting one dollar into it as a nostalgic memento of once historic practice of not spending all money on new clothes, mind blowing travel and i*rap.
    Italian 10Y bonds are at all-time lows, and lower than US, so all is well in Italy.

    • NotSoSure says:

      “Italian 10Y bonds are at all-time lows, and lower than US, so all is well in Italy.”

      Exactly. It will take a lot of nerve to take on the ECB. The best hope to unravel Europe remains with the refugees. You can’t rely on muppets to do real work.

      • d says:

        Illegal immigrants into Europe and job steal immigrants from south and East ( high unemployment states exporting their problems instead of resolving them) stealing jobs in the north and west, overloading its housing and social services. Have all ready done their work.. You have brexit if it occurs the rest will unravel. As germany is not going to pay for everything for everybody.

        The ignorant arrogant Eurocrat Dictatorial Socialist/Communists have killed their own golden goose as they always do.

        The Eu can be saved, but not the way Junker and Hollande want to do it.

        Interesting to note the Calais Jungle situation was allowed to run for years by Hollande Etal until it did its work in helping to drive England to brexit.

        Now after the vote look how quickly the french resolve it adding the final insult. Demanding England take basically all the abandoned children.

        The Euro and the Eu both need to be divided, greece, france, and the other club med states in one . Germany and others in another.

        At the same time this stupid freedom to go to another country with less unemployment, better social benefits, wages and condition’s, then steal anothers job, generally by undercutting rates, needs to be stopped. NOW .

        Freedom to move and fill a genuine skill or labour shortage, is important. It must not be abused, to export local unemployment, or drive down wages and condition’s. which is what is happening..

      • Maximus Minimus says:

        Let’s keep a positive attitude. By the time this historic era is over, the central banking will be history.

        • NotSoSure says:

          LOL. Delusional much? Pretty soon you’ll be saying that we’ve seen the end of war.

          Central banking may go away, but it will be back in some form. Human beings always choose to forget good lessons.

  11. Anonymous says:

    So, who is supposed to buy non performing debt? Any takers? I’m waiting….

    • d says:

      “So, who is supposed to buy non performing debt? Any takers? I’m waiting”

      The problem is the Club-Med Bank’s and Italian Bank’s in particular want way to much for it.

      Considering the snail’s pace and obstructionism of Club-Med Bankruptcy and Housing/Asset foreclosure law’s.

      Before you even get to the fact. That a large % of Italian NPL’S are completely unrecoverable, as they are completely fraudulent, and the Bank’s knew this when they issued the loans.

      Distressed Debt is a business, in which you make a profit. You can not have a chance at breaking even at the price Club-Med bank’s are demanding. The recovery % in Club-Med will be very low, and expensive, yet they want over 25% face value CASH. 10% is still probably too much unless you are allowed to select the loan’s you purchase.

      If there was money to be made. I would be there (at least in Spain and Portugal). You only need, a Lawyer, a Paralegal, a couple of Gangster an Auctioneer. All which are generally shareholders so do not draw massive salary’s. And not that much money as there a plenty of small investors, willing to accept a very small + return.

      Friend’s of mine built a shadow Bank that way. Then sold it for good money, its now one of the biggest stable private Shadow bank’s, in that country.

      Club-Med Bank’s. See distressed debt buyers, as charity organization’s, for them. This is why the Club_Med NPL Mountain, keeps on growing.

  12. Recyvuym says:

    On the 4th of December, Italy will vote No in the referendum, triggering a political crisis and shattering Italian stocks as they signal a lack of confidence in Renzi and a likely Italeave. That’s going to be the spark that finally sets off the bankrupt European banking system. Meltdown begins in five weeks, buckle up.

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