Last Sunday voters rejected the pro-EU government’s and the prime minister Matteo Renzi's proposal for political reform. The proposal was about streamlining the law making process by reducing the power of the Senate and giving more power to the central government. This referendum was considered to be crucial for the government in order to save Monte dei Paschi di Siena and protect the country from a banking crisis. Instead, the referendum left Matteo Renzi to resign and left the state in a political dead-end. The voters considered that the proposal would give too much power for the prime minister and would make the taxpayers' burden of the problem too big. Also making the taxpayers pay for the burden is against the EU's rules of conduct.
Here are the numbers: Total non-performing loans at Italian banks at the end of last year were nearly 360 billion euros, according to the International Monetary Fund. 210 billion euros of those loans are considered to be insolvent. That's over 18 % of the total loans in Italy. Also the Banca Monte dei Paschi di Siena has been ordered by the European Central Bank to reduce its holdings of bad debt. However, because of the low-interest rates, the profitability of the Italian banks is very weak.
Italian banks also suffer from poor management and corruption. According to Financial Times Report, the banks have been distributing loans with various conditions to friends and family as well as forcing corporate customers to buy shares in the bank in return for loans. This kind of corruptive behavior isn't quite extraordinary; the hidden-economy of Italy has been estimated to be as much as 13 % from the GDP.
Italian banks need a bail-out of nearly 45 billion euros and Banca Monte dei Paschi di Siena alone needs 5 billion euros by the end of the year in order to survive. But where? The banks may not be able to raise the money through investors, leaving the government as a last resort. A government bail-out, however, may lead to a loss of investor confidence in Italy’s banking sector and the start of a new Eurozone crisis. Clearly you can see what is the problem here?
The Italian state as a whole has suffered a lot from the financial crisis of 2008. Since 2008, the GDP of Italy has been decreasing almost 25 %. The economic growth over the past ten years has been the second worst in the Eurozone, right after Greece.
These are the facts on which Matteo Renzi was tackling. Because of his resignation, the European Union fears that the current political crisis would make the existing banking crisis even worse. Italy is the third-largest economy in the Eurozone, which clearly implicates why we should be very very concerned of the possible banking crisis. Political stability is already at risk when the banks can't offer loans and credit for the consumers and firms. This will cause even more suffering among the Italian people.
So is Italy going to be the next Greece? That is something we are going to find out on our Holidays. The biggest risk is the risk of nothing being done. Drifting in the waves of a political crisis, great fears are that nothing is being done soon enough. The Italian government has already delayed actions to solve the problem, and soon it is going to be too late.
Greece, Brexit, Deutsche Bank, Italy and the rising levels of populistic nationalism in different parts of Europe. How many more crisis will the EU take? With crisis after a crisis due to political disputes and differences in the banking systems, the tale of EU is probably starting its ending chapter. Joseph Stiglitz has already said his opinion: This is the end.
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