The First Domino

It has been clear since the Euro Crisis began that unless the European Union adopted more Keynesian pro-Growth fiscal policies and more democratic institutions it would ultimately fail, as the economic suffering inflicted on the populace would become unsustainable in any democratic society.

Instead what we have seen is an increase in Neoliberal control (the unaccountable European Central Bank, and the Trioka- the ECB, the International Monetary Fund, and the European Commission) and an explosion of anti-Growth Austerity policies.

Now the wheels are starting to fall off.

Early rebellions in places like Cyprus and Greece were not as easily disposed of as the anti-Democratic Technocrats suggested and not only have their policies failed economically, also Political resentments have increased, not just in the effected countries (including Portugal and Spain), but throughout Europe.

Brexit is an expression of that displeasure on the part of the voting class, you know, the people governments are supposed to represent.

That is only the first domino, I have pointed out recently that French citizens are desperately unhappy with their Government’s Neoliberal “reforms” and anti-EU sentiment there is higher than it ever was in England. Likewise Portugal and Spain are resentful that after suffering under years of Austerity they are being asked to endure yet more sacrifice despite fulfilling all the conditions imposed on them.

i have not yet talked about Italy (only the 4th largest economy in the EU after Germany, Britain, and France) but they may very well be the next to fall and it could happen as early as Friday.

This Friday.

Forget Brexit, Quitaly is Europe’s next worry
by Larry Elliott, The Guardian
Tuesday 26 July 2016 07.50 EDT

Put simply, Italy’s economy is floundering and has been for the past two decades during which time there has been virtually no growth and Italian goods have become less and less competitive in export markets.

Sluggish growth and high levels of unemployment are reflected in the high level of non-performing loans that are now hobbling Italian banks. Potential bad debts have almost doubled to €360bn (£300bn) in the past five years and now account for 18% of all outstanding loans.
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Unlike Greece, Ireland or Spain, Italy did not go through a period of economic boom before the Great Recession of 2008-09. Instead, its performance has been unremittingly poor. The economy is 10% smaller than it was before the financial crisis and as a result unemployment is high, especially in the poorer southern half of the country.

In the days before it joined the euro, Italy would have been able to make itself more competitive by devaluing the lira. That option is no longer available.

The risk, therefore, is obvious. Europe suffers a fresh slowdown as a result of the shock imparted by Brexit. An already weak Italy suffers more than most and its banks start to fail. Small investors are told that European rules mean that they have to shoulder some of the losses.

Matteo Renzi’s centre left government loses power and is replaced by the Five Star Movement, which has pledged to hold a referendum on leaving the euro. Given the state of the economy, Quitaly could not be ruled out. If it happened, the single currency would collapse.

Italy Bank Crisis Looming With Rush to Rescue #3 Bank, Monte dei Paschi
by Yves Smith, Naked Capitalism
July 27, 2016

(T)he big Italian bank domino that observers have been watching most closely, Monte dei Paschi di Siena, will go critical this Friday if (more likely when) it fails the bank stress test. The non-trival problem is that implosion would be so large as to exhaust what is left of Italy’s rescue funds. Yet the ECB and European competition authorities have so far refused to give Italy a waiver under the new banking rules so that it can avoid subjecting small savers who were duped into buying bank bonds to bail-ins. Prime Minister Renzi has had a good bank/bad bank resolution plan ready to go since early this year, but using state funds to support such an approach as an alternative to bail-ins is verboten under the news rules.

So how are the Italians proposing to finesse this mess? A “private sector rescue”. That means having the less sick banks prop up the really diseased Monte dei Paschi. The net effect is to increase systemic risk, since it knits the banks together even more than before. We saw a variant of that in the US financial crisis, when bank regulators had the barmy idea of encouraging banks to buy other banks’ subordinated instruments, creating a major impediment to resolving mid and larger sized banks, since wiping out those instruments would produce losses at other banks, potentially a cascade of failures.

However, the healthier banks have nixed a straight-up equity purchase. As you’ll see, the latest plan looks unworkable, since it calls for more fresh capital via a rights issue. And who pray tell will stump up for that?
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Italian banks are full of bad loans. Italy was seeking authorization to use €40 billion in state funds to rescue its banks. An analyst cited in the Financial Times piece thinks it will take a mere €30 billion. Either way, even if the authorities manage to cobble together a scheme to keep Monte dei Paschi going, the bank failing its stress test would put even more pressure on Italian banks and Eurobanks seen as fragile, such as Deutsche Bank.

The plan in Italy seemed to be to try to hold the banking system together until the constitutional referendum in October. Renzi earlier said he’d resign if it failed but recently he’s tried retreating from that position. Commentators believe that if Italy were forced to resort to a bank bail-in, voters would take their revenge on Renzi in the polling booth. If his referendum failed, Renzi’s government may fall regardless. The pro-exit Five Star movement is the leading party in Italy right now, and it has promised it would have a referendum on leaving the Eurozone. So the political and economic stakes are extremely high.

The death watch over Monte dei Paschi has a Lehman-esqe feel. The powers that be were hoping they could hold off a financial crisis until after a key election, yet they were also deeply committed to not doing any bailouts. The Europeans may be about to learn that their “kick the can down the road” strategy has taken them to the brink of a precipice.