We’ve already talked about the banking crisis in Italy, with 360 billion € in bad loans, the equivalent of 22% of its GDP, an inordinate amount that leads us to fear the worst. The situation has been temporarily stabilised after a deal between the head of government and Brussels: a bailout plan has been negotiated with the Italian State, which gives time for the constitutional referendum in October to take place, where Mario Renzi will put his head on the block. If he wins, he might be able to play for time; otherwise, the political crisis will accelerate things...
Ahead of that, it is important to know what country would suffer the most following a collapse of the Italian banking sector. It is France, no doubt, largely ahead of the other European countries. According to data from Deutsche Bank and the Bank for International Settlements, global liabilities of the French economy towards its Italian neighbour, including banks and non-financial private sector, total more than 300 billion euro, way ahead of the second-place country, Germany, with around 100 billion euro. Both economies are largely intertwined, albeit favouring France, regularly accused of buying back the gems of the local industry in luxury items, telecoms, on top of having major participations in the insurance and banking sectors. Although one should not worry too much about the luxury brands acquired by the French, LVMH and Kerig (Fendi, Bulgari, Gucci, Brioni etc.), liabilities in the insurance and banking sectors could end up being quite costly should a financial crisis arise.
A serious Italian banking crisis would thus touch France immediately, and the whole Euro zone would tremble. But, of course, we can always count on Mario Draghi to start the ECB’s printing presses again to try to drown the gaping holes of the banks’ balance sheets under a deluge of liquidity. But there is no guarantee that will be enough, since the solvency and credibility of the Italian and French banks are called into question.
The BCE, through the European Banking Authority, published on July 29th the results of stress tests in regard to the capacity of the large European banks to support a “black swan” scenario of economic recession and higher interest rates... rest assured, everything’s honky-dory! The same thing happened with the preceding stress tests, which hadn’t foreseen the bankruptcy of Irish and Greek banks... The most underwater Italian bank, Banca Monte dei Paschi di Sienna (BMPS), raised 5 billion euro and this seems to have satisfied the ECB... So, nothing is settled in substance, and worries about Italy and France are still at a very high level.
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Philippe Herlin Finance Researcher / Member of the Goldbroker Editorial Team
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.