Aoife White, “EU Approves $166 Billion Liquidity Guarantee for Italy Banks,” Bloomberg.com, July 1, 2016.The Italian banks reportedly have €360 billion of non-performing loans on their books, and the European Commission – apparently shooting down Angela Merkel’s recent rejection of such a measure – approved a special Italian government scheme to provide as much as 150 billion euros to keep the banks liquid, as well as a separate plan to recapitalise weak banks with 40 billion euros (see here). Sources familiar with the plans said they have been designed to deal with investor panic and even a potential bank run in Italy (!!).
Valentina Pop, Gabriele Steinhauser and Giovanni Legorano, “European Commission Authorized Italian Government to support Banks,” Wall Street Journal, June 30, 2016.
But these measures do not deal with the need to restructure or write off the non-performing loans, and are seen by some as a stop-gap solution.
Indeed, some analysis I have read claims that many Italian banks are technically balance-sheet insolvent already.
The problem seems to be that EU rules prohibit more aggressive government interventions to bail out and fix the banks in an effective manner, and if a really serious banking crisis happens this will empower the anti-EU political forces in Italy to push for a referendum on EU membership, which is already a demand of the Italian Northern League and the “Movimento 5 Stelle” (Five Star Movement) party (which won a number of local elections earlier in June).
With the EU pushing for more austerity in Portugal as well (see here), one has to wonder how long this rotten union is going to last once a new recession hits Europe and nationalist political forces in the south push for political independence or, at the very least, abandoning the Euro.