MACROECONOMICS
doubtful that foreign investors are unlikely to bite. In the past, bankrupt too-big-to-fail banks have sometimes been nationalized. Tat discourages “moral hazard” – rewarding banks for bad behavior – but it’s at the cost of imposing the bad debts on the government. Further, new EU rules require a “bail in” before a government bailout,
something the Italian
government is desperate to avoid. As explained on a European website called Social Europe:
Te EU’s banking union, which came into force in January 2016, prescribes that when a bank runs into trouble, existing sta k e h o l d e r s – namely, s ha r e ho l d e r s , junior creditors and, sometimes, even senior creditors and depositors with deposits in excess of the guaranteed amount of €100,000 – are required to take a loss before public funds can be used . . . . [Te problem is that] the subordinated bonds that would take a hit are not simply owned by well-off families and other banks: as much as half of the €60
billion of subordinated bonds
are estimated to be owned by around 600,000 small savers, who in many cases were faudulently mis-sold these bonds by the banks as being risk-fee (as good as deposits basically).
Te government got a taste of the potential backlash a year ago, when it forced losses onto the bondholders of four small banks. One victim made headlines when he hung himself and leſt a note blaming his bank, which had taken his entire €100,000 savings.
Goldman Sachs Weighs In It is not just the small savers that
FX
. . . All of which helps to explain why banks and their representatives at
the IMF
and the ECB are fantically demanding a no-expenses-spared taxpayer-funded rescue of Italy’s banking system.
It could also explain why Goldman Sachs took it upon itself to propose a way out of this dilemma: instead of buying Italian government bonds in their quantitative easing program, the ECB and the central bank of Italy could buy the insolvent banks’ nonperforming loans.
As observed in a July 2016 article in Te Financial Times
titled
“Goldman: Italy’s Bank Saga – Not Such a Big Deal,” Italy’s NPLs then stood at €210bn,
are at risk. According to a July 2016 article titled “Look Who’s Frantically Demanding Tat Taxpayers Stop Italy’s Bank Meltdown”:
Te total exposure of French banks and private investors alone to Italian government debt exceeds €250 billion. Germany holds €83.2 billion worth of Italian bonds. Deutsche bank alone has nearly €12 billion worth of Italian bonds on its books. Te other banking sectors most at risk of contagion are Spain (€44.6 billion), the U.S. (€42.3 billion) the UK (€29.8 billion) and Japan (€27.6 billion).
and the ECB was buying €120bn per year of outstanding Italian government bonds as part of its quantitative easing (QE) scheme. The author quoted Goldman’s
Francesco Garzarelli,
who said, “by the time QE is over – not sooner than end 2017, on our baseline scenario – around a fifth of Italy’s public debt will be sitting on the Bank of Italy’s balance sheet.” Bringing the entire net stock of bad loans onto the government’s balance sheet, he said, would be equivalent to just nine months’ worth of Italian government bond purchases by the ECB.
FX TRADER MAGAZINE January - March 2017 65
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