Eurozone Whistles Past its Biggest Threat

Italy’s Multi-Headed Hydra Predicament.

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

For the last three years, the political establishment in Italy and beyond have had a field day attacking, ridiculing, and vilifying Beppe Grillo’s 5-star movement. Europe’s media have tarred him with the brush of populism. In 2013 The Economist labelled him a clown on its front cover. Yet his party still leads the polls. And that lead is growing.

A new Ipsos poll in Corriere della Sera newspaper has put Beppe Grillo’s 5-Star Movement on 32.3% – its highest ever reading. It placed 5.5 points ahead of the governing PD, on 26.8%, after the PD dropped more than three percentage points in a month, as former prime minister Matteo Renzi battles to reassert his authority following a walkout by a left-wing faction.

Internal political battles are nothing new in Italy. The country enjoys a hard-earned reputation for political instability and paralysis, having seen 63 governments come and go since 1945. The problem this time around is that internal weakness and strife in Italy’s traditional center-left and center-right parties could end up gifting the next election to a party that refuses to play by the book.

If it wins the next elections, which could be brought forward to as early as June this year, 5-Star Movement has pledged to hold a referendum of its own — albeit a non-binding one — on Italy’s membership of the euro. As polls have shown, there is much broader public apathy toward the single currency than in just about any other euro zone nation. Grillo’s plan could also receive the backing of former prime minister Silvio Berlusconi who is determined to pull off a political comeback and is talking of restoring the Italian Lira.

As Reuters reports, such a scenario could spook financial markets “wary of both the 5-Star’s euroskepticism and the threat of prolonged political instability in Italy,” which boasts a public debt burden of over €2 trillion (133% of GDP). In any normal situation that would be a problem. But Italy is not in a normal situation; it is on the cusp of a potentially very large financial crisis that, if mishandled, could bring down Europe’s entire financial system.

Unlike many other Eurozone economies like Spain, Ireland Portugal, Italy did not experience a real estate or stock market bubble in the 2000s; nor were its banks heavily exposed to the financial derivatives that helped spread the fallout from the U.S. subprime crisis all around the world. As such, Italy has not had cause to bail out its financial system — until now.

While other countries, Germany and France included, lavished tens of billions of euros on their troubled banks at the height of Europe’s banking troubles, Italy’s banking problems have been allowed to fester and grow until they have reached the stage that the banks now require a massive infusion of public funds from a government that already boasts the fourth largest public debt on planet Earth. The Italian government has so far managed to club together €20 billion worth of funds to save — or at least stabilize — Monte dei Paschi and a clutch of mid-sized banks, but it still needs explicit approval from the European Commission to proceed with the operation.

That approval is still not forthcoming, for two obvious reasons:

  1. A bailout without a bail-in of the banks’ creditors would be against new EU rules on bank resolution and if there is a bail-in, it could exacerbate fears of contagion within the financial system as creditors withdraw even more money from Italian banks;
  2. There’s little appetite for more bailouts of Southern European banking systems among Northern European countries, as was clumsily articulated by Dutch Finance Minister and President of the Eurogroup Jeroen Dijsselbloem.

As a result of EU inaction, the Italian banks that need a last-minute reprieve continue to languish in limbo. Monte dei Paschi, which has the highest proportion of problem loans among Italian banks in relation to its capital, is waiting on the results of the ECB’s latest audit of its books, which could unearth even more unpleasant surprises on its balance sheets. As MPS itself said, the possible impact on the bank’s solvency is an element of “significant uncertainty” regarding its ability to continue to operate.

Then there are the two regional banks Banca Popolare di Vicenza SpA and Veneto Banca SpA which were supposed to have been saved last year by an intervention from government-sponsored, privately funded bank bailout fund Atlante, but which are now requesting more public funds.

Some experts, including the U.S. bank hired at great cost last year to save MPS, JP Morgan Chase, have warned that Popolare di Vicenza and Veneto Banca will not be eligible for a bailout since they are not regarded as systemically important enough. This prompted investors to remove funds from the banks, further exacerbating their financial woes. According to sources in Rome, the two banks’ failure would send shock waves through the wider Italian financial industry. It would also provide fresh fodder for anti-euro forces in Italy.

Italy’s current predicament is a multi-headed hydra: a banking crisis, an economic crisis, a debt crisis, and a political crisis all rolled into one, and all coming to a head at the same time. It’s the reason why economists including Deutsche Bank AG’s Marco Stringa are calling Italy, not France or Greece, the “main risk” to euro-area stability.

From a Eurozone-stability point of view, and from a bondholder point of view, the best-case scenario would be the rescue of Italy’s banks, with taxpayers bearing most of the brunt. That should help steady investor nerves and put an end to the gathering exodus of funds out of Italian assets.

But even then, the social, political and economic price to be paid in a country already with public debt of over €2 trillion, youth unemployment of almost 40%, and an economy that is 12% smaller than it was 10 years ago, will almost certainly be way too high. If roughly half of all Italians are against the single currency today, imagine what it will be like when austerity begins really biting. By Don Quijones.

If the ECB scales back stimulus, banks face even greater risk of collapse. But now there’s a new solution. Read…  Deepening EU Banking Crisis Meets Euro-TARP and Taxpayers

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  24 comments for “Eurozone Whistles Past its Biggest Threat

  1. Debravity says:

    Hey Don,
    I think I may have asked this before, but have you considered doing an article on what the potential fall out would be for ordinary people (of a meltdown in Italy with contagion).
    Say, for people whom might have €20-150k saved in a European bank, in euros. I met an Irish accountant (a self-proclaimed Libertarian) who is convinced that the financial system will self-destruct any day now (Alex Jones style), which I think is a tough one to be so confident about. But, on a smaller scale, you refer to this issue of the eurozone and its potential monetary instability. I think a lot of people who read you and think a lot of your opinion, would die to have something they could read about what the potential consequences of this issue, that you constantly refer to, really could be for the average saver. This accountant guy is big in gold and silver notes. Sheesh, I don’t know. It all sounds very tin foil hattish (especially as all that is just more paper) – but maybe you could flesh it out and enlighten us on tee otter side of this case you keep making?!

    • Don Quijones says:


      First of all, thanks for your very kind words. They are, as always, most appreciated.

      As to your question, as Spaniards are wont to say, “Bufffffff!” It’s a very big one and it requires an even bigger answer. Unfortunately, between Wolf Street articles, translations and social commitments (a dinner with friends chez moi tonight), I’m seriously pressed for time right now.

      The one thing I would say is that if you’re in the euro zone and you’re fourtunate enough to have a reasonable amount of savings in cash, diversifying your currency exposure (by getting dollars, maybe even some sterling) is probably not a bad idea right now. And of course, gold and silver will always be money, regardless of what governments and central banks might say. They are also arguably the best insurance policy against a catastrophic currency collapse, which is not completely out of the equation.

      It’s always interesting to see how differently people used to currency shocks and crises behave compared to those who aren’t. Here in Barcelona, for example, a lot of Latin Americans of moderate means from countries like Peru, Ecuador and Bolivia have a habit of turning whatever meager savings they have into gold or silver jewellery, rather than keeping it all in cash. Call it the wisdom of experience.

      One final word: whatever you do, Deb, don’t take this as investment advice :-]

      Have a great weekend,


      • Steve says:

        Every nation should reject all IMF-style austerity demands. If banks loaned money unwisely, then they should lose capital as poor bankers should it this situation. No people should be enslaved by decisions for which they did not sign on, a fundamental human right of freedom.

        The IMF’s austerity prescription is long-proven to not be effective in rebuilding a country’s economy, so let the bankruptcy also be the bankers’ problem. Start over with a new currency if that is the best approach. All the wealth there is that which is here now. Use it to grow a better future and not redeem an old pack of falsehoods. Next time, the banks should know better than to inflate fiat loans to shear the sheep.

  2. Sound of the Suburbs says:

    The McKinsey Global Institute – “Poorer Than Their Parents? Flat or falling incomes in advanced economies”, July 2016

    “In a startling finding, the report said that 65 to 70% of households in 25 advanced economies were in income segments that had flat to falling incomes between 2005 and 2014, up from less than 2 percent between 1993 and 2005. More troubling is that for some of the biggest supposed winners from globalization such as the US, this number is as high as 81%, while in Italy it soars to just shy of 100%!”

    Trump and Five Star come from the stats. you don’t see.

    • Bruce Adlam says:

      And it’s getting worse bit by bit day by day it doesn’t look good at all .the richer the rich get the poorer the poor get. History is repeating itself we as society with all our education haven’t learnt a dam thing .

      • Intosh says:

        Our modern society has this cultural belief that the new is always better than the old, that the future is brighter than the past. So naturally, we as a society ignores the past and forgets history and traditions.

        And there is also what I call the “pigeon syndrome”. Most people in developed world have never directly experienced disaster (financial or otherwise); they have never known what living in real hardship (e.g. war, famine, economic depression) is like. Many of them have never lived in a world where people save before they spend. Au contraire, the world they are familiar with is one where you spend every dime you earn and spend on credit if you don’t earn enough. In the world they know, every movies have a happy ending. (By contrast, if you survey films or literature produced in regions going through generations of hardship, most are depressing and sad.)

        • animalogic says:

          Great comment. There IS a great level of social/cultural ostrich-like blindness in much of the West to the financial dangers that lie ahead.
          I guess the causes are multiple: as you noted, many westerners simply have little or no experience with hardship. And, naturally, our culture generally & the MSM/TPTB, do everything to keep the ostriches head down. Not to mention that many people work so hard they have limited time -or -energy to consider neoliberalism’s or indeed, capitalism’s systemic problems.
          In a socialistic sense, raising “class consciousness” is, in the absence of an “exploitable” Crisis, very difficult. And, depending on the severity etc of a crisis, at that point it could well be all too late…(the “big (methane)burp” & nuclear war come to mind)

        • Intosh says:

          “Not to mention that many people work so hard they have limited time -or -energy to consider neoliberalism’s or indeed, capitalism’s systemic problems.”

          It is the same playbook elites have used to control the masses throughout history. panem et circenses: bread and circuses. It’s always the same idea, just in different forms. Today, the bread is that new smartphone or that new car you work so to be able to buy. As for circuses, you have plenty to choose from for distraction: the MSM, Reality TV, “social” media (Snapchat, Facebook), etc. Keep you busy and keep you distracted and you won’t question the system.

          Besides, it’s hard to be one “in the know”, questioning the system because you would be the outlier swimming against the current, the weird one, the loser (“Hey look, I worked hard, and I drive this fancy car, I own a big TV set. You don’t drive a fancy car and have a smaller TV set. I win, you lose. You can’t even compete in the game.”), the outcast. It’s much easier to just follow the herd, play this stupid game like everyone else without questioning.

          I like to believe that humanity’s progress (social or technological) has always been ignited by the work of 10% of the people, the remaining 90% are simply blind followers.

        • d says:

          “I like to believe that humanity’s progress (social or technological) has always been ignited by the work of 10% of the people, the remaining 90% are simply blind followers.”

          1% would be a lot closer to accurate.

  3. Kent says:

    The ECB should be able to step in, move the NPLs off the books to a bad bank, bail-in the banks creditors and shareholders, fire and replace executive management, and put proper controls in place. Then perform an IPO. Do that for all the banks in trouble in Italy at the same time.

    The major losers would be Northern European banks and wealthy Italians. But that shouldn’t be a concern of the central bank.

    • Jonathan Vause says:

      as usual, while it makes perfect economic sense, of course this is politically impossible. the same as for other ‘solutions’, such as full fiscal union, Germany and other northern countries leaving the euro to club med and starting their own currency, and so on. and unfortunately while what is unsustainable cannot be sustained indefinitely, it can usually be sustained much longer than any rational analysis would predict, leading to much greater damage than any rational policy choices would inflict

  4. RD Blakeslee says:

    Not fashionable now (maybe never was, but we used to give lip service to it, so there was some restraint imposed by it):

    “The love of money is the root of all evil”.

    The elite’s response to the pain of others caused by their gain: Buy refuge in New Zealand.

    • TJ Martin says:

      “The love of money is the root of all evil”

      An interesting follow up . The Bible from which this quote is paraphrased contains over 100 references to the evils of greed , accumulation of wealth etc with an entire book dedicated to the subject [ Proverbs ] In fact you’d be hard pressed to find a single scripture taken within context and not proof texted that in any way supports or allows for Capitalism as we know it . And yet at least here in the good ole US where the majority ‘ claim to be Christians …. who are and have been at the forefront of the ‘ Greed is Good ‘ turned ‘ Greed is God ” movement to the point of now having electing the very personification of narcissistic greed ?

      The American Evangelical and Fundamental ‘ christians ‘ [ using the word very loosely ] and to a lesser extent Roman and Orthodox Catholics .

      As a Reformation Theologian / Scholar / Apologist all I can say is welcome to the blatant hypocrisy of American christianity [ small case intentional ] placing the majority of the Bible they claim to hold so dearly aside replacing it with the Gospel of Ayn Rand

      • RD Blakeslee says:

        While it is true, I think, that the essence of both the Jewish and later, the Christian faiths are communal, The economics of the time of their origins could not have contemplated capitalism – its possibility depended on great advances in knowledge.

        Wealth was “created” primarily from agriculture and commerce. The industrial age was two millennia yet to come.

        Greed puts any and all of us in psychological fetters, regardless of the age in which we live.

        There isn’t anything in capitalism per se which prevents us from exercising charity.

        • TJ Martin says:

          ” There isn’t anything in capitalism per se which prevents us from exercising charity.”

          There is actually . At least there is in todays Capitalism .. especially Alt Right / NeoCon capitalism which has firmly entrenched itself in the Gospel of Ayn Rand that loudly proclaims selfishness to be a virtue and any form of charity , philanthropy or altruism to be immoral

          As for the rest of your reply .. we’d need at least a five hour [preferably convivial ] face to deal with the issues you’ve brought up .

        • d says:

          “While it is true, I think, that the essence of both the Jewish and later, the Christian faiths are communal, The economics of the time of their origins could not have contemplated capitalism – its possibility depended on great advances in knowledge.”

          Athens gave us modern western sovereign default, in the 4th century BC.

          Jewish money lenders have been using “Debenture Bond’s” among themselves since there have been Jewish money lenders.

          The Book in question speaks against greed and more Importantly “Hoarding”. Hoarded wealth, being a waste, as it is not working. The concept that money had to keep on changing hands, to be of use to society, was known, and is what drove the anti hoarding position.

          The Book does not speak against profit making.

          What the book did envisage, and spoke against.

          Was what has become the Globalised Vampire Corporates, currently allied with china.

          Who desire to control the global payments system and have it cashless. This is the beast that you can not trade with, less you have its number.

          Which the book strongly warned against.

          Expecting writings1500, or 3000 + years old, to use modern term’s, is unrealistic.

          Your interpretation of the book, is that it has no concept of capitalism.

          Many Torah scholars, will not agree with you.

    • Frederick says:

      Do they actually believe running to NZ will save them because I dont It may buy them some time though

      • RD Blakeslee says:

        I agree.

      • TJ Martin says:

        So far the only one claiming to be bailing on the US buying himself a NZ citizenship and passport has ironically been Peter Thiel . Ironic because he was and still is in full support of the very thing he now wants to run away from .. Trump !

        Ahhh … hypocrisy reigns supreme here in the good ole US of A

        FYI ; To both Frederick and RD . The real reason behind Theil’s escape plan to NZ which reveals his true character as well as overall mental state [ delusional at best ] is the fantasy that somehow JRR Tolkien’s Middle Earth will become a reality in NZ .. his only basis being the fact that the movies were filmed there .

  5. JR says:

    The Italian tragedy is really reflective of the global paradigm shift of low-skill labor endlessly searching for the cheap needle. And I mean sewing machine needle, not what you are thinking. Generally wages will continue to “globalize” – that is flatten. Manufacturing flees from any country where wages are too high or regulation exists (at all). Therefore the Italian leather and luxury goods manufacturing has been destroyed. Grillo blames the banksters and the euro for Italy’s problems, and doesn’t trust the media. He is right on that last one, but the banksters and their politico enablers are pretty much stuck. They can’t grow out of this, and can’t bail out of this due to screwing the populace with idiotic forced bank bond extortion that are now worth zero, but quietly decomposing in every household in Italy. If Italy does leave the euro, all the bureaucrats pensions get revalued in venti mille lire terms, so it is pension death if this actually happens. The Depp State (not a typo) (pardon my Deutsch) will fight a Euro departure tooth and nail. What happens next? No farthing clue. But your popcorn is doomed to get really cold before things actually move along in this fiscal traffic jam. There ain’t no solution, just as TAANSTAAFL.

  6. RD Blakeslee says:

    “… the Gospel of Ayn Rand that loudly proclaims selfishness to be a virtue and any form of charity , philanthropy or altruism to be immoral.” – TJ Martin

    “The fact that a man has no claim on others (i.e., that it is not their moral duty to help him and that he cannot demand their help as his right) does not preclude or prohibit good will among men and does not make it immoral to offer or to accept voluntary, non-sacrificial assistance.” – Ayn Rand ( )

    Also, charging all of capitalism, or even “Alt Right / NeoCon capitalism” with some form of discipleship to Rand is overstated, I think – most capitalists (i.e. anyone who owns a business or common stock in one) is unlikely to have ever heard of Rand.

    Nonetheless, while Randism (or any other “ism”) isn’t to blame IMO, the The informal norm used to be to give lip service to the idea that “Love of money is the root of all evil”.

    • d says:

      “that “Love of money is the root of all evil”.

      Love of money is not the root of all evil. There are a lot worse things to have a love of, hence and addiction to.

      However wish to posses lots of money, simply for the sake of possessing it (Hoarding) is unhealthy.

  7. RD Blakeslee says:

    So-called “Populism” is just a name for the socio-political reaction to the pain of the “have-nots” as the “haves” continue to increase their dominance at the expense of the “have nots”.

    This article recognizes the pain that would be caused if the international financial system collapsed and that a bailout would be hard on taxpayers (the “have -nots”).

    The elites represented by :the bondholders (etc.) would fare better,

    If the system failed, the haves would feel pain along with the have-nots, for a change.

    To awful to contemplate? By whom? The have-nots? What have they got to lose, compared to the haves?

    What can the “have nots” gain?

    Their heritage, their tradtions, their culture.

    • d says:

      “If the system failed, the haves would feel pain along with the have-nots, for a change.”

      This is more beat the rich because we can and it feels good BS.

      No matter how much pain the top endures, the bottom will always endure more.

      That’s the way all systems work, even the great held up as socialist equality Stalinist USSR. And CCP china where every politburo member is a multi billionaire.

      You want the top to be hurt even though this means much more pain at the bottom.

      I am unsure if you are a Sadist or a Masochist. Either way to wish suffering on some, which results in greater suffering on others, means you are very sick.

      Envy, and its politics, have entered your mind, and done bad thing’s with it.

      Envy, is a much greater Evil/Sin/Poison, than greed

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