Italy’s Bank Meltdown Could Be Contagious

The world’s oldest surviving bank (Italian), Monte Dei Paschi, could soon be out of business…Goldman Sachs maintains that some form of state intervention is both likely and, at this late stage, desirable. Portuguese lenders could need up to €7.5 billion to resolve a “systemic banking crisis.” In Spain, while the banks are not yet begging for public money, there are ominous signs on the horizon. Bottom line: the contagion risk of Italian banks and their bonds is significant, for banks in Portugal, Spain, France, Germany – and also the UK, and the U.S.

By Don Quijones 

The Situation in Italy

Last week saw two out of three of the members of the institutional triad formerly known as the Troika — the ECB and the IMF — lend their support to a taxpayer funded bailout of Italy’s banking system. So, too, did the biggest U.S. bank by assets, JP Morgan Chase. All that was needed was for Europe’s most influential bank, New York-based Goldman Sachs, to give its blessing. That came on Monday in a report whose conclusion is fittingly Goldman-esque: saving Italy’s banks is not just necessary; it would be a bargain for all concerned. The authors breezily point out that the €210 billion euros of non-performing loans (ha, the ECB says €360 billion and growing every time someone looks at it) on the books of the banks could all be wiped out with the equivalent of just nine months of ECB President (and former Goldmanite) Mario Draghi’s bond purchases..

Here’s the FT:

With the ECB hoovering up €120bn per year of outstanding Italian government bonds as part of its quantitative easing scheme, “by the time QE is over – not sooner than end 2017, on our baseline scenario – around a fifth of Italy’s public debt will be sitting on the Bank of Italy’s balance sheet”, writes Francesco Garzarelli at Goldman…

Bringing the entire net stock of bad loans onto the government’s balance sheet would be equivalent to 9-months worth of BTP [Italian government bond] purchases by the ECB…With four days for authorities to come up with a plan to inject capital into Monte dei Paschi, Goldman adds that some form of “state intervention is both “likely and, at this late stage, desirable”.