Italian banks battered after ECB warns MPS about bad loans
The financial crisis is coming back to roost in Italy after warnings about Banco Monte dei Paschi di Siena's massive amount of non-performing loans caused Italian banking shares to plumb new depths.
The eurozone central bank also ordered MPS to present by October 3 its plans to cut the ratio of doubtful loans to 20 percent of its total loan portfolio by 2018.
At the Milan stock exchange, the request was seen as an ultimatum and in effect as a call to the country's entire ailing banking sector, which is burdened by fragile balance sheets and a staggering 360 billion euros in bad loans.
Other Italian banks also fell heavily, with top bank Unicredit declining 3.6 percent. Since January, the FTSE Italia All-Share Banks index has plunged 55 percent.
Italy bank crisis more dangerous to EU than Brexit
Italy's prime minister Matteo Renzi is considering "unilateral action" to bail out Italian banks with taxpayer money, in violation of EU rules. Action is needed because Italy's already fragile banking system has a staggering $420 billion of bad loans on its books. Italy's bank crisis and confrontation with the EU has gotten so deep that some analysts that it threatens the European Union "worse than Brexit."
Italy's largest bank is Banco Monte dei Paschi di Siena (MPS), founded in 1472, and the world's oldest operating bank. Its share of bad loans comes to $55.2 billion. There may be a major crisis on July 29, when the ECB announces the results of the latest rounds of bank "stress tests." It's believed that these stress tests will force major recapitalizations on MSP and other Italian banks.
MPS's stock price has fallen 80% in the last year, and fell 14% on Monday, following reports that the European Central Bank is going to issue an "ultimatum" to reduce its bad loans portfolio to $32.2 billion by 2018.
The European Union put these banking union rules into place in 2015, and already they're facing a major confrontation, which may turn into a major crisis on July 29, when the ECB's stress tests of Italy's banks will be published. If Italy follows the rules, hundreds of thousands of additional people will lose their life savings. That's why prime minister Matteo Renzi has issued his ultimatum that he will violate EU rules and bail out the banks with taxpayer money. However, this will only "kick the can down the road," in a familiar process where one crisis is solved, but a new one emerges a few months later.
Italy readies rogue bank bailout
The country has been labelled the biggest European threat to the Single Market in post-Brexit Europe...
Several Italian officials and bankers have told the media that the PM is determined to intervene to protect the country's banks despite warnings from Brussels and Berlin. New rules hope to shift the financial burden of assisting troubled banks on to creditors and away from taxpayers.
"We are willing to do whatever is necessary [to defend the banks], and do not rule out acting unilaterally, although that would only be as a last resort," one source told The Financial Times.
Last week, German Chancellor Angela Merkel signalled that she would not support requests to temporarily suspend state aid and bail-in rules to recapitalise Italian banks - arguing that is would end the European banking union. Prime Minister Renzi responded by saying he will not be "lectured by a school teacher."
DYI Comments: I've stated many times over if you want to know where the next set of fire works would emanate from, look no further, the Italian banks. It appears that a black swan event is brewing where multiple negative events happen simultaneously. England possibly leaving the EU(they haven't formally evoke article 50) Italian banks on the skids and uncontrolled mass migration from mid east and northern African countries who's culture and religion incompatible to Europeans.
The most likely scenario is a continuous grinding down of the European economy with nations breaking away from the Union. Bank bailouts and bailins along with countries who leave the EU who will devalue their currency through inflation so they can export their way out. Within 7 to 10 years from now the debt issues private or government will be lowered to more than acceptable levels. Actually, I see Europeans pushing the debt levels to very low levels to their respective GDP's. Simply human nature. The generation that is coming up have become very debt adverse and will push debt reduction as their number one priority.
The biggest reform needed for ALL 1st world countries including the U.S. are their version of Social Security and medical care(Medicare). The birth rate is so low, that's right women having babies, there are always far less future taxpayers to care for the elder's social programs. To make up the short fall their governments have borrowed massively. These high levels of borrowing are like a ship attempting to leave port while dragging its anchor on the bottom of the ocean. Meager GDP growth exacerbating their ability to service their debts.
| Country | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2013 | 2014 |
|---|---|---|---|---|---|---|---|---|---|
| European Union | 1.48 | 1.47 | 1.47 | 1.5 | 1.5 | 1.51 | 1.58 | 1.59 | 1.6 |
Replacement is 2.1 to maintain population
First world stock markets mean invert. A fancy way of describing a secular (very long term) change in stock and bond valuations. The U.S. market peaked on a secular basis in the year 2000 and despite two massive sell offs we are once again in bubble territory. As reported by John Hussman of the Hussman Funds the median stock valuation is greater than the year 2000 grand Daddy of bubbles. Be as that may as measured by the Shiller PE U.S. stocks(S&P 500) are clearly overvalued.
7-1-16 Shiller PE is 26.00
To mean invert valuations will move below the Shiller PE of 10. This will take two or three cyclical moves to achieve this ultra low valuation. The S&P 500 has formed a two year plus arch. This is a topping formation for this current cyclical down side move. Of course to get the selling going a pin is needed to burst this bubble. The Italian banks fits the bill.
Updated Monthly
AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 7/1/16
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DYI
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