Italy’s Ailing Banks

CA - 2016-7-11 - Italy's Ailing BanksThe Next Big Thing to Worry About that you’ll soon be reading about in the financial press is Italian banks.  Some Italian banking stocks fell more than 30% after the Brexit vote on fears that the Eurozone will experience weaker-than-expected economic growth.  Worse: the Italian banking system now reports that nearly $400 billion worth of its collective loans are non-performing—about 18% of the total.  Compare that with the fact that, at the height of the financial crisis, only 5% of the loans in U.S. banks were categorized as nonperforming.

The problems have been made worse by the negative interest rates prevailing across Europe (try making money on zero or negative-interest loans), and worse still by new European Union provisions that restrict state aid for companies, meaning that the Italian government is prohibited from using tax dollars to recapitalize its banking system.  Instead, the banks are required to go into a form of bankruptcy, which would mean losses by ordinary Italian savers who own bank-issued bonds.  At last count, the $221 billion worth of citizen-held bonds makes up 5% of their total savings.

The European Commission is obviously not anxious to have its rules prevent one of its founding members from restoring financial health so soon after the Brexit vote, and is said to be looking for a solution.  One creative way out might be for the government to declare that the bonds were sold fraudulently—and there might be a case, since citizens apparently believed they were buying the bonds was as safe as banking deposits.  In that case, the government could set up a restitution fund, and buy the bonds back at a slight discount, re-capitalizing its banking system through the back door.

One way or another, you will hear about yet another strain on the European economy and another severe test on the loyalties of another important member of it.  What will the press call the possibility of an Italian exit from the Eurozone: Ixit? Itexit?


About Objectively Speaking

Tom Batterman, founder of Vigil Trust & Financial Advocacy and Financial Fiduciaries, LLC is in the business of representing the best financial interests of his clients. Having provided objective, fee-only financial management services for over two decades, he specializes in managing the investment and related financial affairs of individuals and mutual insurance companies who do not have the time, interest or expertise to manage such matters on their own. As an objective, unbiased professional who takes on a fiduciary responsibility to his clients, he guides clients to the financial decisions they would make themselves if they had years of training and experience and the time and expertise to fully research and understand all of their options. Founded in 2010 as an outgrowth of Vigil Trust & Financial Advocacy, Financial Fiduciaries, LLC is a financial management solution for individuals and mutual insurance companies who recognize they do not have the time, interest or expertise to properly attend to their financial matters on their own. While there are many financial “advisors”, most of them have investment products to sell and the “advice” they provide is geared toward getting their clients to engage in a purchase. As one of the rare subset of advisors known as “fiduciary advisors”, Financial Fiduciaries does not sell any investment product so its guidance is not compromised by conflicts of interest which plague ordinary advisors. Prior to his employment in the financial industry in financial advocacy and trust positions, he worked at a private law practice in the Wausau area in the areas of estate planning, tax, retirement planning, corporate organizations and real estate. He is a graduate of the University of Wisconsin-Madison and the UW-Madison Law School and has during his career held Series 7, 24 and 65 securities licenses. A longtime resident of the Wausau, Wisconsin Area, Tom is active in the community. He enjoys golf, curling, skiing, fishing, traveling and spending time with his family.
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