Who Gets to Pay for the Italian Banking Crisis?
The missing Capital Buffer.
Six years after Europe’s sovereign debt crisis began, the Eurozone’s third largest economy, Italy, has finally decided to do what just about every other country has done when facing a full-blown, almost out-of-control banking crisis: to set up a bad bank to hide its worst debt.
It was only a matter of time: in the last six years, Europe’s economies have been drowning in an ever-expanding vitrine of bad debt — and none more so than Italy, where non-performing loans have soared to more than 350 billion euros, a fourfold increase since the end of 2008. At 18%, Italy’s ratio of nonperforming loans is more than four times the European average (and Europe’s banks are in worse shape than America’s). It’s the equivalent of 21% of GDP in a country that boasts Europe’s second highest public debt-to-GDP ratio (130%), just behind Greece, and where the banks hold over 70% of the country’s debt.
To make matters even worse, if Brussels gets its way, Italy’s government will not be able to dip into future taxpayer funds to stop its debt-laden banks from dropping like flies. European law no longer allows that sort of thing. Well, not really. Now, in the wake of new regulations that came into effect at the beginning of this year, collapsing banks in Europe will be “resolved” with the funds of stockholders, bondholders and other investors, including account holders with deposits of more than €100,000 euros — instead of classic bailouts that would raid directly or indirectly the taxpayers of other countries.
It might even make bank creditors realize that investing in a bank is not a risk-free venture.
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