As Chinese money pours out of the motherland as the slow motion financial crash continues to build, Italian banks are suffering. European bank shares on the Euro Stoxx bank index have fallen by more than 50% in the 12 months to June 2016, reflecting the fact that non-performing loans are equal to 18% of balance sheets. The rush for the exit door was speeded-up by the EU’s bank bailout rules that require investors to take severe haircuts rather than allow the banks to be bailed out by state money.
In Italy most of the banks have been shut out of the capital markets for some time so they cannot raise the fresh money needed to shore up their bad loans.
Shares in Monte dei Paschi di Siena has crashed by 14% on Monday this week after it was ordered to cut by a third its €46.9bn of bad loans within the next three years – and almost impossible task. The situation is changing daily but there has been some suggestions from Italian politicians that they will bailout the bank under Article 107 of the Lisbon Treaty to inject capital, if necessary up to a limit of €40bn raised through sovereign bonds or guarantees. “No prime minister can let his banking system collapse just for the sake of enforcing the EU’s crazy rules,” said an Italian government spokesperson.
If the Italians do this and the EU does nothing then the state aid rule may as well be thrown out of the window. EU action against state aid in the aviation industry for EU airlines has had a significant affect – indeed Malev Hungarian Airlines collapsed as a direct result of the EU state aid legislation. Forget Brexit, that is a sideshow that gives other EU nations the vanguard to demand changes. The Eurozone is in crisis anyway and Italy is at the very epicenter.