Eurozone's South still poses an enormous risk

[admin]

Today the future looks considerably less bright, and less assured, for the former mayor of Florence. In a few months, probably in November, Italians will head to the polls to vote in a referendum on a constitutional reform that Renzi says will make it easier to pass legislation by dramatically restricting the powers of the senate, a major source of political gridlock. But whereas as recently as a few months ago a win for Renzi seemed likely, things are suddenly a great deal more complicated. And when the Italian prime minister contemplates the fate of David Cameron, consigned to political history after his own ill-starred referendum, he must feel distinctly queasy. Much like Brexit in the UK, the referendum is increasingly being seen as a way for Italians to air their general discontent with the establishment, in large part because Renzi swore that he would leave politics if the referendum did not go his way. If he loses his gamble, the results of the referendum could have vast consequences for Italy and the whole of Europe. A defeat could potentially open the door to a new national election that could see the Eurosceptic, populist Five Star Movement push the Democratic party out of power.

Will Italy be Europe’s next casualty as Renzi risks all on referendum? | World news | The Guardian

Italy's economy failed to grow between April and June as the country struggled with its creaking banking sector. GDP growth shrank to 0% in the second quarter compared to 0.3% in the first quarter.

Italian economy stagnates as German growth slows - BBC News

[admin]

What has been so vicious is the Republicans have actually opposed job assistance—even for those who lose their jobs because of trade. The irony is that they were the ones who pushed these trade agreements the most. Then, when people were hurt, they didn’t want to do anything about it. And the result is they wound up with a candidate who’s said, “Let’s get rid of all the trade agreements.” So you might say they’re getting their comeuppance.

“An Utter Failure”: Joseph Stiglitz on the Euro and Europe’s Uncertain Future | New Republic

We discuss Stiglitz take here

[admin]

And while Greece's problems continue to be kicked down the road, a new problem is coming to the forefront: Italy is facing a full-blown banking crisis. On Tuesday, trading in Monte dei Paschi di Siena, the world's oldest bank and the third-largest lender in Italy, with about 170 billion euros ($190 billion) in assets, was halted after the shares slid nearly 6% over concerns of weak investor interest in its emergency rescue plan. About 50 billion euros, or about 30% of the bank's assets, are bad loans. And while Atlante, the privately funded bank bailout fund, will be buying assets, BMI Research says that alone may not be enough. Additionally, the country's two largest lenders, UniCredit and Intesa Sanpaolo, are among those backing the bailout fund, so their bottom lines will feel it if things go bad.

Italy banking crisis brews, investors balk at Monte dei Paschi bailout - Business Insider

It's not just Monte dei Paschi that is in trouble. Italy's entire banking system is at risk as nonperforming loans have climbed to account for 17% of all loans. Earlier in 2016, the banks Popolare di Vicenza and Veneto Banca saw Atlante take controlling stakes, and additional capital injections were made in August, putting further pressure on the country's healthier banks.

Italy banking crisis brews, investors balk at Monte dei Paschi bailout - Business Insider

[admin]

"The markets are too complacent," said Daniele Antonucci from Morgan Stanley. "We think Italian bonds and European equities broadly under-price the risk of the Italian referendum." Portugal is also falling out of favour again after three consecutive months of contracting industrial output. The country remains in a low-growth trap, struggling to whittle down the highest debt ratios in the developed world. Morgan Stanley's Joao Almeida recommends shorting Portuguese debt, warning that a lurch back into crisis remains a latent risk.  "A weak economic structure, along with high economy-wide leverage and a fragile banking system, make the debt trajectory vulnerable," he said.

Foreign appetite for gilts revives as bond worries shift back to eurozone

[admin]

His concern is that European banks — particularly Italy's — hold bad "non-performing loans" that are improperly valued, posing a very serious risk to the banks' solvency. "In the Italian system, the banks say they are worth 45-50 cents in the dollar. But the bid price is 20 cents. If they were to mark them down, they would be insolvent." In short: If many European banks admitted the true value of their loans, they'd go under, Eisman believes — potentially sparking a new financial crisis.

'Big Short' investor Steve Eisman is worried about European banks' non-performing loans - Business Insider

EU regulations go so far as to prohibit Italy from using its state funds to shield investors and shareholders of banks from losses, unless there is risk of “very extraordinary” systemic stress. Rather, the EU has adopted a bail-in strategy. The bail-in strategy is, in theory, a way to ensure fair competition and stability in the financial sector across the eurozone. It protects countries, like Germany, from spending their money on bank failures in other countries. It also keeps the ECB from printing extra money and exposing Europe to inflation that would reduce the position of creditors. The fear of inflation is remote at this moment, but it still is an institutional principle of the ECB. And controlling national spending on banks imposes fiscal discipline on countries that seek to bail out not just banks, but the equity holdings of investors, who will lose their investment when the bank fails. Who Pays When a Bank Fails? The issue is this: who is considered an investor? In the view of the EU, depositors are—in cases of a bank resolution—investors in the bank.

Italy's banking crisis could bring disastrous consequences - Business Insider

The impact of a "no" vote in the upcoming Italian referendum could be far more serious for Europe than Italy, according to analysts, who believe it would form part of the same underlying force as Brexit and the U.S. election victory for Donald Trump. Italian citizens will vote on constitutional reform on December 4 with Prime Minister Matteo Renzi gambling his political future on the decision. He has said he would resign if his wholesale changes to the political system are rejected by the country.

Euro zone break-up fears back on the table with Italy expected to reject reforms

Italian banking stocks came under renewed pressure on Friday on growing jitters before the Dec. 4 referendum on a constitutional reform which could unseat Prime Minister Matteo Renzi. Italy's bank sector index .FTIT8300 fell as much as 4.2 percent to its lowest level since October 5, weighed down by losses in bank heavyweights UniCredit and Intesa Sanpaolo.

Italy's banks stocks under pressure on referendum jitters

[admin]

The increasing political uncertainty across advanced economies is risking the stability of the euro zone, the region's central bank warned in a new biannual report on Thursday. The uncertainty surrounding upcoming key referendums and elections across the 19-member euro zone bloc, along with expected policy changes in the U.S. raise inflation and growth challenges for euro area countries, the European Central Bank (ECB) said. Such uncertainty could lead to a global asset market corrections, it stated.

ECB warns that risks of global market corrections have ‘intensified’

Shareholders in Monte dei Paschi di Siena approved a 5 billion euro ($5.3 billion) share issue on Thursday, the third cash call in as many years to keep Italy's third-biggest lender afloat. The Tuscan bank, the world's oldest still in business, needs to raise more than seven times its market value in cash in order to sell bad loans and boost capital after industry stress tests in July singled it out as Europe's weakest. New Chief Executive Marco Morelli told shareholders he had showcased the bank's rescue plan to more than 250 investors, including hedge funds and sovereign wealth funds, in the 70 days since taking office, but had failed to obtain any firm backing. Weighing on investors' mind is a constitutional referendum on Dec. 4 which could topple Italy's reformist government and usher in a period of political instability.

Monte dei Paschi shareholders approve vital capital boost | Daily Mail Online

According to the International Monetary Fund, Italian banks hold roughly $400 billion in troubled loans. Currently, the six worst-performing stocks in the European banking index are all Italian. And the situation could become even worse for those debt-ridden banks if the "no" vote wins. It could undermine the stability of the European financial system and make it more difficult for the Italian banks to turn the corner. "Raising capital will be more difficult with a big 'no,'" said Alberto Gallo, head of global macro strategies at asset management firm Algebris Investments.

Italy referendum: The next vote that could shake Europe is next week

Monte dei Paschi  (BMDPY) , the world's oldest bank, secured the backing of shareholders for its latest bailout on Thursday. But despite the sigh of relief that might of whisked through the hallways of the bank on Thursday night, Monte dei Paschi's biggest challenge is still ahead.  The vote gives the board the authority to push forward with a JPMorgan Chase  (JPM) -led rescue plan that will see it raise €5 billion ($5.3 billion) of new equity -- nearly 10 times its market capitalization. The floundering Italian lender has crumbled steadily over the years since the financial crisis, under strains of a growing pile of nonperforming loans and weak profitability -- leading to no less than four separate bailouts. The rescue plan, which has been pitched as a full and final solution to the bank's woes, will also involve a debt-for-equity swap that requires a number of unsecured creditors to take haircuts equivalent to around 15% of par value. In total, around €3 billion of debts are expected to be converted into equity. Shareholder backing brings the bank one step closer to being back on a sustainable footing, but it doesn't mean that it is out of the woods. The bank must still find buyers for its €27 billion nonperforming loan portfolio and persuade investors to back it with as much as €2 billion of new cash equity -- no easy feat when its market value is little more than €700 million.

Monte dei Paschi's New Hurdle, After Shareholders OK Rescue - TheStreet

[admin]

Growth in the global economy could accelerate to 3.4 percent in 2017 but the outlook is clouded by political risks, Morgan Stanley has warned. The investment bank warned uncertainty regarding a new administration in the U.S., the start of Brexit negotiations and key elections across Europe could undermine global growth. "With the Italian referendum, the French presidential election and the German general election, we are essentially attempting a political triple jump in Europe," Elga Bartsch, global co-head of economics at Morgan Stanley, said on Monday.

Europe could be on the brink of a 'political triple jump', Morgan Stanley warns

Italy is failing to reduce its heavy debt burden and the structural part of its overall deficit has been rising since 2014, rather than falling by the 0.5% of GDP each year that the EU authorities ostensibly require until a country balances its books in structural terms. Italy has attributed its poor deficit performance this year to extraordinary spending on migration and post-earthquake reconstruction, though other ongoing structural features such as a weak banking sector and poorer-than-expected growth have also contributed, with our Consensus Forecast putting GDP growth at only 0.8% both this year and next. Ultra-low inflation has also hindered Italy’s debt reduction efforts.

Debt & Deficit Outlooks for France, Italy, Spain, & Portugal | Wolf Street

[admin]

Prime minister Renzi is desperate to win, not only to avoid triggering his promise to resign if he loses, but also to push through legislation that has spent much of the last couple of years trundling back and forth between the lower house of deputies and the upper house, the senate. Both have equal status and reject each other’s legislative initiatives. The proposed constitutional changes would demote the senate to being a body of 100 members appointed by regional leaders who can discuss regional matters and have oversight of changes to Italy’s relationship with Brussels. No longer, says Renzi, will attempts to liberalise high street chemists and usher in competition get stuck in the system for two years while senators and deputies with equal status cry foul. Senators will have a different job.

Yes, Italy’s constitution needs fixing. But not as urgently as its banks do | Business | The Guardian

There is a silver lining to a No vote. Renzi could be persuaded by the president to form another government with a view to tackling the electoral system. Before elections that must be held in 2018, he could produce a system that recognises the need for a winner from Italy’s three main political blocs, including Silvio Berlusconi’s old party, Forza Italia. If so, a clear winner would solve many of the country’s problems. The government could also make strides to shore up the banking sector, which needs around $40bn by most estimates, to offset the mounting losses from decades of bad loans.

Yes, Italy’s constitution needs fixing. But not as urgently as its banks do | Business | The Guardian

"It's analogous to central bank support of a bank which is illiquid - having trouble raising money on private capital markets - but not insolvent, i.e. its balance sheet is basically OK. The central bank acts as a lender of last resort to banks in that situation. Similarly, under OMT, the central bank would act as a lender of last resort to illiquid national governments - but only with conditions attached," König said.

Is the ECB allowed to prevent eurozone bond market panics? | Business | DW.COM | 15.06.2015

The problem in Italy is that several banks flogged around €30bn of their subordinated bonds to ordinary Italian households, rather than just sophisticated institutional investors such as pension funds and insurance companies. Subordinated, or junior, bonds are first in line for losses in the event of a bail-in. And according to the IMF retail investors also hold a third of the total €600bn of bank bonds.

Italy referendum result: What is going to happen to the country's fragile banks? | The Independent

[admin]

Italy’s largest bank, UniCredit, plans to shed thousands of jobs and raise €13bn in the country’s biggest share issue in a bid to shore up its reserves and boost profits by the end of the decade. The bank said 14,000 posts, or 11% of the workforce, would disappear across its businesses in Europe and 1,000 bank branches in Italy would close. About €18bn of bad loans are to be offloaded to two new businesses mainly owned by US fund managers. The bank’s shares rose 13% as investors welcomed the “decisive” move by UniCredit to distance itself from Italy’s ailing banking sector, which is hobbled by a legacy of non-performing loans.

Italian banking crisis: UniCredit to raise €13bn | Business | The Guardian

[admin]

Led by prime minister, Paolo Gentiloni, the government is now expected to force private investors owning about €2.1bn of the bank’s bonds to take losses.

Italy to bailout Monte dei Paschi di Siena bank with €20bn rescue fund | Business | The Guardian

“European banking stocks are expected to remain under pressure. [The] Italian banking crisis is enhanced by mounting tensions in Spanish banks, which are now due to pay billions of euros on mortgage deals after they lost the EU case over mortgage-floor clauses,” said Ipek Ozkardeskaya, senior market analyst at London Capital Group, in a note.

European stocks slip, as Banca Monte dei Paschi stands on the brink - MarketWatch

While Monte dei Paschi is considered a small bank relative to multinational giants, the fallout from a bailout could have far reaching consequences for global investors. There are concerns that the jitters could spread to other Italian banks and that the €20 billion set aside by the government on Wednesday won’t be enough to prop up all of the struggling lenders. Ipek Ozkardeskaya, senior market analyst at London Capital Group, estimates Italian banks need €52 billion to be rescued.

5 things to know about Banca Monte dei Paschi di Siena’s crisis - MarketWatch

And there’s another issue. A taxpayer funded-bailout carries the risk of a political backlash that could empower the so-called euroskeptic and anti-establishment 5 Star Movement. With the risk of snap elections in Italy next year, voter anger could propel this populist party into the driver’s seat. That could mean “Quitaly” or “Brexit 2.0.” Additionally, a euroskeptic government in Italy could lead to a surge in bond yields, credit downgrades and added troubles for banks, analysts say.

5 things to know about Banca Monte dei Paschi di Siena’s crisis - MarketWatch

As the poster child for the Italian bank crisis, Monte dei Paschi is saddled with a mountain of non-performing loans that is eating into its capital. It has the highest proportion of bad loans among Italian banks at around 36%. It has been asked to shed €28 billion of those loans to make it healthy again.

5 things to know about Banca Monte dei Paschi di Siena’s crisis - MarketWatch