The fun in Europe is only just resuming–when will the fat lady finally sing?
Eurocrat rigidity about half-baked bail in rules could turn an Italian banking crisis into a full bore financial and political meltdown.
The problem with the Italian banks thus isn’t the complexity of the problem; it’s the scale, and the fact that Italy sits in the Eurozone, which has a Rube Goldberg bank resolution scheme that the authorities are unwilling to admit won’t work in practice.
Italian banks have an estimated €360 billion of bad loans, which is roughly 20% of GDP. While the value of these loans is not zero, the losses that need to be taken to clean up the Italian banks are enough to focus the mind. Having Italy’s banks remain in a zombified state means they aren’t giving much in the way of credit to businesses that need it. Italy has a high proportion of small to medium-sized businesses. That makes it particularly dependent on bank lending, so the dodgy banks are a drag on the economy.
The fallout from the Brexit vote continues to rock the European financial system. On Wednesday, the British pound dropped to a fresh 31 year low as confidence in the currency continues to plummet. At one point it had fallen as low as $1.2796 before rebounding a bit. As I write this, it is still sitting at just $1.293. Meanwhile, the problems for the biggest banks in Europe just continue to mount. At one point on Wednesday Credit Suisse hit an all-time record low, and German banking giant Deutsche Bank closed the day at an all-time record closing low of 12.93. Overall, Europe’s Stoxx 600 Bank Index closed at the lowest level in almost five years. What we are watching is a full-blown financial meltdown in Europe, but because it is not personally affecting them yet, most Americans are not paying any attention to it.
The collapse of the British pound that we have seen since the Brexit vote has been nothing short of breathtaking. In fact, CNN says that this “is what a currency crash looks like”…