Why Italy’s Banking Crisis Will Shake the Eurozone to its Core
Italian loans are causing real suffering. The €360 billion from Italian banks show borrowers are weighed down with debts they cannot afford, while the banks are struggling to offer new credit to the households and firms that need them.
Now they have spread to the wider economy, and are morphing into a political crisis with implications across the EU. It could bring down Italy’s government.
If no compromise is reached between Rome, which wants to protect bondholders, and the EU, which wants to enforce the rules, it could even bring down the Eurozone.
Under current projections, the economy will not get back to its pre-crisis size until 2025. In other words, Italy faces not one, but two lost decades. As a result, its banks are sitting on a vast stockpile of bad loans, and the situation will only worsen if the status quo continues.
Either way, something has to be done soon. By the end of this month, the European Banking Authority will have published new figures showing the banks’ weak capital positions.
The stress tests have been ignored in the past, but it is becoming harder to brush aside international comparisons with increasingly strong banks in other countries.
Bank of England Governor Mark Carney said Italy’s banks’ capital positions will only get worse if no action is taken. That is to say, even in their current poor positions, the Italian banks are artificially propped up by unreliable assets that will soon be stripped away from them.
The situation is unbearable for Italy. Expect a political bust-up followed by economic uncertainty and then—if Italians can stomach the other tough economic reforms necessary to free up their labour market and swathes of industry—some form of recovery to put the country back on track to prosperity.