11-23-2016, 12:15 AM
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.
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.