As several articles over the past few days have indicated (here, here, here and here), Italy is on the brink of a full-blown banking crisis. Bad debts, or "non-performing loans," held by the banking sector total 360 billion euros, which is a remarkable 17 percent of all the outstanding bank loans in Italy and equal to about one-fifth of the annual Italian GDP. It is also many times the level of bad debt held by Italian banks at the peak of the financial crisis in 2008. Since the beginning of 2016, prices of bank stocks have decreased by more than 50%. In the case of Italy's oldest and most troubled bank, Banca Monte dei Paschi di Siena, its share price has declined more than 75%. It doesn't help that the Italian economy is struggling mightily to recover from the last financial crisis and is still 8% smaller than it was in 2008 and roughly the same size as it was at the end of the twentieth century.
The Italian government is considering bailing out the banks in defiance of EU rules concerning "bail-ins." These rules require that a bank's creditors, especially bondholders, "take haircuts" before taxpayer funds can be used to "recapitalize" the banks. The Italian government is reluctant to follow these rules because almost half of the banks' junior, or subordinated, bonds, about 31 billion euros worth, have been sold on the retail market to households and individuals rather than to professional investors. In the case of insolvency, the holders of junior bonds are the last of the bank's creditors to be paid. In its appeal to the EU to suspend its bail-in rules, the Italian government is portraying the retail purchasers of these bonds as small and naive savers. But this does not ring true. In 2015 the Italian government rescued four small banks. In compliance with EU rules it put the burden of the rescue on bank creditors rather than taxpayers. As a result, 12,500 "small savers" lost a total of 430 million euros on junior bonds. That is an average of 34,500 euros lost per bondholder. ..... To Read More
The Italian government is considering bailing out the banks in defiance of EU rules concerning "bail-ins." These rules require that a bank's creditors, especially bondholders, "take haircuts" before taxpayer funds can be used to "recapitalize" the banks. The Italian government is reluctant to follow these rules because almost half of the banks' junior, or subordinated, bonds, about 31 billion euros worth, have been sold on the retail market to households and individuals rather than to professional investors. In the case of insolvency, the holders of junior bonds are the last of the bank's creditors to be paid. In its appeal to the EU to suspend its bail-in rules, the Italian government is portraying the retail purchasers of these bonds as small and naive savers. But this does not ring true. In 2015 the Italian government rescued four small banks. In compliance with EU rules it put the burden of the rescue on bank creditors rather than taxpayers. As a result, 12,500 "small savers" lost a total of 430 million euros on junior bonds. That is an average of 34,500 euros lost per bondholder. ..... To Read More
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