Should You Be Concerned About Italy’s Banks?

The Market Gage - Dillon Gage's Precious Metals Newsletter

Are Italy’s banks are on the brink of disaster? Today, let’s explore some of the compelling facts that lend weight to this concern.

Italy’s debt–to-GDP ratio is at 132 percent. What makes matters worse, Italian bank’s non-performing loans are at 200 billion euros which is 8 percent of all outstanding loans. Some analysts say the real number is 360 billion Euros or 15 percent of their total outstanding loans. For the most part these loans are considered uncollectable.

Italy’s government is struggling to control its debt and in the event of a banking crisis will the government have the ability, if allowed, to bail out their banking system or will they be forced to ask for assistance?

Here’s why the possibility of Italy’s bank failures is just around the corner. Did you know that the European Union and the European Central Bank and the central banks of the member countries cannot bail out failing banks by infusing new capital to keep them solvent? That means, EU regulators prohibit Italy from using its country’s funds to bail out banks unless there is a risk of systemic failure.

Just a few days ago, the stock of major Italian bank Monte dei Paschi dropped 23 in percent and trading was suspended. The decline was triggered after a report that the bank will cut 2500 jobs and close 500 branches. In July European regulators rated Italy’s Monte dei Paschi’s the weakest of European banks that were stress tested, as their capital buffer was totally wiped out in the stress test. The bank had a minus 2.44% ratio of their capital to total risk-adjusted assets when the economic pressure was applied.

On another note, this year’s European stress tests left out Portuguese and Greek banks. I’m curious why? I’m sure after reading what going on in these two countries one would think they should conduct a stress test on their banks at least once a year if not more. One more sign that the European regulators, like our politicians here, just want all these problems to go away.

Once again the (IMF) has commented that the Italian loan problems are the biggest concern to the European

Here in the states we are familiar with the term bail out. Europeans have adopted the term bail-in which attempts to ensure fair competition and stability in the EU. It protects countries like France and Germany from taking their money and bailing out failing banks. The term bail-in also stops the European Central Bank from printing more money to bail out the banks. So with a bail-in, the investors take on the risk of his or her deposit in the financial institution.

There is something similar to our F.D.I.C. insurance that is available on up to 100,000 euros, but not a euro over that will be insured. Any amount of euros above that amount are subject to loss in the event of a bank failure.

This is a concern for businesses because anything over 100,000 euros in any Italian bank is at risk. This puts the owner of any business in the hot seat to make sure he does his due diligence on where to put his money. And what about the retirees who saved all their lives to enjoy the fruits of their labor and finds out all but 100,000 euros are at risk.

In the event of a major bank failure, I can imagine panic would set in as depositors would be lining up to safe guard their money and withdraw what they can. In the event of a major bank failure in Italy, does this set the stage for a systemic risk around the rest of the EU community?

Case in point: Having read this and knowing that there is a potential bank crisis facing the European community, I find it as no surprise that we have seen a strong overseas presence in our equity markets.

So If you resided in one of the countries mentioned in the article, the big question is: what do you do with your money?

Sounds like a slogan for a new TV commercial?

Have a wonderful Friday.

Disclaimer: This editorial has been prepared by Walter Pehowich of Dillon Gage Metals. This document is for information and thought-provoking purposes only and does not purport to predict or forecast actual results. It is not, and should not be regarded as investment advice or as a recommendation regarding any particular security, commodity or course of action. Opinions expressed herein are current opinions as of the date appearing in this editorial only and are subject to change without notice and cannot be attributable to Dillon Gage. Reasonable people may disagree about the opinions expressed herein. In the event any of the assumptions used herein do not come to fruition, results are likely to vary substantially. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions and each investor should evaluate its ability to invest for a long term especially during periods of a market downturn. No part of this editorial may be reproduced in any manner, in whole or in part, without the prior written permission of Dillon Gage Metals. This information is provided with the understanding that with respect to the opinions provided herein, that you will make your own independent decision with respect to any course of action in connection herewith and as to whether such course of action is appropriate or proper based on your own judgment, and that you are capable of understanding and assessing the merits of a course of action. You may not rely on the statements contained herein. Dillon Gage Metals shall not have any liability for any damages of any kind whatsoever relating to this editorial. You should consult your advisors with respect to these areas. By posting this editorial, you acknowledge, understand and accept this disclaimer.