Italy’s Banking Crisis

Italy is in the throes of a banking crisis. Since no American troops are involved and there’s no obvious way to turn it to domestic political advantage, we don’t hear much about it here in the States. Here George Friedman presents a briefing and some observations on it:

This crisis has absolutely nothing to do with Brexit, although opponents of Brexit will claim it does. Even if Britain had unanimously voted to stay in the EU, the Italian crisis would still have been gathering speed.

The extraordinarily high level of non-performing loans (NPLs) has been a problem since before Brexit, and it is clear that there is nothing in the Italian economy that will allow it to be reduced. A non-performing loan is simply a loan that isn’t being repaid according to terms, and the reason this happens is normally the inability to repay it. 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.

The crisis was hidden, in a way, because banks were simply carrying loans as non-performing that were actually in default and discounting the NPLs rather than writing them off. But that simply hid the obvious. As much as 17 percent of Italy’s loans will not be repaid. As a result, the balance sheets of Italian banks will be crushed. And this will not only be in Italy. Italian loans are packaged and resold as others, 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.

I honestly don’t know how one could conclude that Europe’s financial problems aren’t due to Italy, Greece, Portugal, Spain, France, or the United Kingdom but due to Germany. Maintaining a nationalist mercantilist trade policy in the context of common currency leads inexorably to such problems. We’d have the same problems if California or New York maintained a mercantilist trade policy with respect to the other states.

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