EU Bail In Rules Ignored By Italy – Mother Of All Systemic Threats and World War?
By: GoldCore
GoldSeek.com
Friday, 16 September 2016
By George Friedman for Mauldin Economics via Forbes
Italy has been in a crisis for at least eight months, though mainstream media did not recognize it until July. This crisis has nothing to do with Brexit, although opponents of Brexit will claim it does. Even if Britain had voted to stay in the EU, the Italian crisis would still have been gathering speed.
The high level of non-performing loans (NPLs) has been a problem since before Brexit. It is clear that there is nothing in the Italian economy that can reduce them. Only a dramatic improvement in the economy would make it possible to repay these loans. And Europe’s economy cannot improve drastically enough to help. We have been in crisis for quite a while.
Banks were simply carrying loans as non-performing that were actually in default and discounting the NPLs rather than writing them off. But that only hid the obvious. As much as 17 percent of Italy’s loans will not be repaid. This will crush Italian banks’ balance sheets. And this will not only be in Italy.
Italian loans are packaged and resold, and Italian banks take loans from other European banks. These banks in turn have borrowed against Italian debt. Since Italy is the fourth largest economy in Europe, this is the mother of all systemic threats.
Bail-Ins, Not Bail Outs
The only way to help is a government bailout. The problem is that Italy is not only part of the EU, but part of the eurozone. As such, its ability to print its way out of the crisis is limited. In addition, EU regulations make it difficult for governments to bail out banks.
The EU has a concept called a bail-in, which means the depositors and creditors to the bank will lose their money. This is what the EU imposed on Cyprus. In Cyprus, deposits greater than 100,000 euros ($111,000) were seized to cover Cypriot bank debts. While some was returned, most was not.
The bail-in is a formula for bank runs. The money seized in Cyprus came from retirement funds and payrolls. Rome wants to make sure depositors don’t lose their deposits. A run on the banks would guarantee a meltdown. A meltdown would topple the government and allow the Five Star Movement, a Euroskeptic party, a good shot at governing.
The bail-in rule exists because Berlin doesn’t want to bail out banking systems using German money. Anti-European sentiment in Germany is already growing, with the rising popularity of the nationalist Alternative for Germany party. The Germans feel that they are fiscally responsible, and they resent paying for others’ irresponsibility.
Therefore, the German government’s hands are tied. It cannot accept a Europe-wide deposit insurance system, as it would put German money at risk. Nor can it permit overprinting of the euro. That would come out of the German hide as well.
The Italians can only try to manage the problem by ignoring EU rules, which is what they are doing.
The Rest…HERE
