World Economy

Italy Bank Crisis Portends Danger

Banca Monte dei Paschi di SienaBanca Monte dei Paschi di Siena

Italy has asked the European Commission for more time to sell a handful of small savings banks it bailed out last year, highlighting the ongoing struggles of a country swamped with massive debt and suddenly moribund growth.

Italy, which promised the European Commission to sell Banca Marche, Banca Etruria, CariFe and CariChieti, may have to resort to state aid in the event that it does not find suitors who can guarantee stability. Meanwhile, Italy’s oldest lender Banca Monte dei Paschi di Siena recently agreed to a new restructuring plan with the European Central Bank based on a £5 billion ($6.49 billion) capital injection and the securitization of £28 billion worth of bad loans, neurope reported.

Italy may not look and feel like a nation on the brink of a major crisis. In reality, it is slowly buckling under the weight of £270 billion in bad loans–a third of the Eurozone total. Italian Prime Minister Matteo Renzi has called for a referendum in December that would give him the scope to enact much-needed reforms.

A failure to secure a “Yes” vote would not only lead to Renzi’s  resignation, it could pave the way for an Italian exit from the embattled European Union.

As experts rightly note, “Quitaly” would be a catastrophic blow to the EU.

Another financial crisis is brewing in Europe, this time involving German lender Deutsche Bank. The company was recently fined $14 billion by US lawmakers related to its mortgage-lending business during the housing bubble. While Germany is much stronger economically than Italy, Deutsche Bank’s problems pose a potentially bigger risk than any individual Italian bank. This assessment was also shared by the International Monetary Fund.

For Renzi, Deutsche Bank has diverted attention away from his country’s banking crisis.

“We have always said that the European Union has to do everything in its power to fix the problems of the banking sector and the main worry focuses on the German lenders,” the prime minister told national broadcaster RAI.

Italy and Germany have been at odds about who should bear the burden of bailing out Monte dei Paschi. Rome wants to shield institutional investors and ordinary savers, whereas Berlin wants to distribute the costs among these stakeholders.

Italy’s economy stagnated in the second quarter, ending five consecutive quarters of expansion.

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