Maybe not today, maybe not tomorrow, but soon Italian banks will need to be nationalized. The Italian banking system is like a garbage dump on the edge of town. Only when the winds shift, do you realize how much it stinks. The winds are shifting. Let’s count down the reasons why.
1. European Central Bank council member Ignazio Visco said some medium to large Italian banks need more capital as the country’s recession drags on. (BBG) Everything about this eurocrisis is spun hard before it is released to the media. If an ECB Council member is willing to go on record with this statement, then the situation is probably more dire than the central bankers are admitting. We have reason to doubt their credibility. Look at how they have handled the Monte dei Paschi scandal so far. From out of nowhere the bank requires a €3.9bn bailout after three disastrous derivative trades are revealed, and then we learn that the bank had a near death experience a little over a year ago, which was disclosed by neither the authorities or management.
2. Decaying Economic Conditions. Italy is in the midst of a recession, and the situation is deteriorating. Industrial production hit a recent low and unemployment a ten year high with GDP steadily decreasing. These factors will invariably lead to an increase in non-performing loans in the banking system:
3. Political Intrigue. Silvio Berlusconi has returned from the dead. Starting from way back, he has managed to pull to a statistical dead heat for the premiership in elections scheduled for February 24. The center-left is embroiled in the MPB scandal, and Bunga Bunga has linked it to a very unpopular property tax, which coincidentally raised the same amount of money as the secret bailout from 2011.
If Bunga is reelected, he will make life difficult for Merkel ahead of her election, and Italian bond yields will rise. In fact, he has already made statements supporting an Italian return to the euro, and his political allies continue to beat this drum:
4. Higher Bond Yields. Italian government bonds have already bounced off their January lows and have picked up in proportion to Bunga’s strength in the polls. Italian banks are stuffed to the rafters with them. They account for over 15% of MPB’s holdings and are popular with all Italian banks. A further rise in rates will create large capital needs for the entire system all at once.
5. What’s on those balance sheets anyway? MPB had three secret derivative trades which caused the bank to seek a bailout. There’s a good chance that other Italian banks have undisclosed trades hiding in the basement. If these banks are politically connected, they may also have received secret loans from the Bank of Italy.
6. The nationalization process has already commenced. MPB is being bailed out. As the economy weakens furthers, other banks will require assistance. Furthermore, regulators want the power to change bank management, overruling shareholders in the process. While it may not be called a nationalization just like the third Greek bailout was euphemized as a restructuring, it will be a nationalization nonetheless.