Once Italian lawmakers in December approved a 20 billion Euro plan design to rescue Italy’s weakest banks, it would be easy to say the country – and the Eurozone – could breathe a bit easier. After all, we can point to instances in other countries in which banks have been revitalized after the government recapitalized them.
When we think back to the US banking crisis, financial institutions across the country made a serious comeback upon recapitalization. Remember Spain’s housing bubble? The government recapitalized their banks and, for a period of time, those institutions came back strong as well.
However, there is a key difference between Italy’s banking crisis and the events of the other countries mentioned above. To illustrate what we mean, take a closer look at this chart:
Remember, the weakest Italian banks are being bailed out by a plan that requires 20 billion Euro. Yet, as you’ll see above, over 40% of the loans on the books of Italian banks are not performing. In fact, estimates on the value of Non-Performing Loans reach 360 billion Euro.
Translation: The 20 billion Euro in bailout funds for Italy’s weakest banks are nowhere near sufficient.
Unlike the US banks that roared back or Spain’s banks that had some lift after government recapitalization, Italy has been experiencing “a decline a productivity and growth that long pre-dates the financial crisis.
The Euro isn’t dead yet.
But it’s not the picture of great economic health either.
We’ve been seeing a “kick the can” strategy from the Eurozone for about six years now. There is growth in the region but it continues to be slow. And providing continuous bailouts to unprofitable banks – particularly when Italy’s case where the sum is inefficient to do so as it is – isn’t solving the real problem. The challenge here is deeply systematic and requires a far more comprehensive solution for the sake of preserving Italy’s banks and possibly the Euro as a whole.
 GaveKal Research: Nick Andrews, December 20th, 2016 “A €20 Bn Start in Italy.”
John Eberle, CFA® is a Financial Advisor & Chief Investment Officer at Fiduciary Financial Partners. For nearly 20 years in the investment management industry, John has helped high net worth individuals plan a future that they and their families can embrace with confidence.
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