Italy’s broken banks – the spectre haunting Europe

Italian banks are on the brink of collapse and EU rules make bail-outs seem politically impossible. Will they fall – and who will they take down with them? Simon Wilson reports.

http://moneyweek.com/broken-italian-banks-the-spectre-haunting-europe/

Why the worry over Italian banks?

A spectre is haunting Europe – the spectre of banking collapses in Italy, which could lead to renewed crisis in the eurozone, and a wider banking crisis affecting other countries with high exposure to Italian bank debt. Italy’s banks are in deep trouble, weighed down by €360bn of bad debt (“non-performing loans” in the jargon), equivalent to a fifth of Italy’s GDP (and about 18% of all the banks’ loans).

Shares in the sector have slumped this year as investors began to price in the risk of banking collapses. One of the worst affected has been Monte dei Paschi di Siena, the world’s oldest bank. The sell-off has gathered pace since the shock of the Brexit vote on 23 June caused investors to reevaluate the risks facing European assets.

Who is most exposed?

Italy’s nascent banking crisis risks political as well as economic turmoil in Italy itself. But there is also, crucially, a serious risk of contagion, with the potential to unleash a broader eurozone banking crisis. Most exposed, by some distance, are the French. According to figures from Die Welt, the total exposure of French banks to Italian debt exceeds €250bn.

That’s three times as much as the second most exposed European nation, Germany, whose banks hold €83.2bn-worth of Italian bonds (Deutsche Bank alone has more than €11.76bn, increasing the fears over that bank’s long-term stability). The other banking sectors most at risk of contagion are Spain (€44.6 bn), America (€42.3bn), the UK (€29.77 bn) and Japan (€27.6 bn).