Italian voters, who said “no” on 4 December, may trigger a major banking crisis, and not only for their country but for the whole of Europe. This was stated by the well-known American economic commentator Michael Snyder.
The people made an important decision for their country. However, it has seriously affected the stock markets. And it is connected no longer with the constitutional reform, but with the fact that Matteo Renzi resigns.
New elections, apparently, will bring to power Beppe Grillo’s party “Five stars”. And it’s known that this politician has repeatedly stated that he would withdraw Italy from the Eurozone. Therefore bureaucrats from the European Union are extremely dismayed. The euro has plunged to its lowest level against the dollar since December 2015. And it is very bad news for those who still dreams of a unified Europe and tries to hold EU member states together, motivating them by a common currency.
According to Michael Snyder, for the economy of Italy in the long term it will be better to abandon the Euro. However, now the banking system of the country is in a very serious situation and it badly needs the support of the European Union. Without this support, the eighth largest economy of the planet may be in the midst of an unprecedented financial crisis.
Michael Snyder also believes that ordinary Italians have to be very careful and understand what challenges they will encounter in the near future. In fact, this crisis, which began in Italy, can provoke a European problem. Not necessarily, of course, it’ll happen. However, it’s necessary to be prepared.
The votes were not yet counted to the end, and stock markets have recorded absolutely sharp decline of the Euro. It fell by as much as 1.3% to $1.0569, its lowest level since December 2015. After a similar drop in the past, the Euro recovered in almost two years.
This drop below the level of March 2015 sent the European currency to bottom, passing the border of the lowest level of 2003. The stock market players think it could lead the Euro to full parity with the dollar.
In early 2014, the Euro was trading for $1,40. Michael Snyder warned for almost two years that it was possible that the Euro would equal the dollar. Today, he says “we’re almost there.”
Well, the problem with Italian government bonds will further exacerbate the crisis.
Italy’s national debt is one of the highest in the world. It is $2.4 trillion. It is approximately 130% of GDP. Is it a serious figure? Approximately the same was the public debt of the Greek government before this country has been plunged into chaos. We all know about the very high national debt of the US, which is 104% of the GDP of this country.
Budget expenditures in Italy are more than 50% of GDP. All these figures indicate that the government is in very unenviable position.
And at the same time, Italian government bonds are sold at too low rates. Some experts believe that this is a record low rate. Moreover, the Italian shares have a negative yield in more than $1 trillion. Of course, investors don’t want to buy such securities. Now, after the referendum, according to some economic observers, we can only wait for the Italian bonds to fall.
To save not only Italy but also the EU, the European Central Bank should start printing money. It will put the governments of other European countries in a critical situation. And the Euro is forced to lose even more, which will affect the wallets of European citizens.
The house of cards of the banking sector of Italy is bursting at the seams. Eight banks threaten to collapse. They are burdened with a huge amount of bad loans. And that’s 360 billion Euros or 20% of GDP.
According to the rules of the European Union, governments are unable to recapitalize their banks. The government of Matteo Renzi tried to solve the issue. It gave guarantees to attract investment into the banking sector of Italy. For this purpose, the state Fund Atlante was involved. However, the situation is not saved. The fall of the value of shares of Italian banks continues. The next day after the referendum, the decline was 5%. Attempts at recapitalizing banks may prove ineffectual.
In the January 1, 2016 new European laws came into force, under which the government can give subsidies to banks only if the costs of the restructuring debts will first be incurred by the shareholders, investors and all who have any bank assets and bonds, in other words, by ordinary citizens of Italy.
The oldest bank of the world and one of the largest banks of Italy, Monte dei Paschi di Siena, began to place shares worth more than 4 billion Euros on December the 7th. However, do private investors want to invest their money to save the troubled banks? Quite possibly, the state will have to buy back these shares at the expense of the budget, burdened with payments on liquidation of consequences of catastrophic earthquake.
In the near future the political situation in Italy will only escalate. And the existence of distressed banks in the area of the powerful political turbulence may continue to provoke a very difficult situation. And it may well be that the banks will stay with bad debt burdening their balance sheets. Overall it is a very negative impact on the economic growth of the country.
It is also worth noting that, according to Financial Times, Italian industrial production declined by 25% since 2008. And it was the year of the global economic crisis.
Today, leading EU officials and experts try to reassure the financial markets and the public in order not to provoke a panic, which is able to cause economic damage to Italy and the EU as a whole. The European Commission states that Europe is strong enough to overcome all the challenges.
The head of the Eurogroup Jeroen Deysselblum said that the result of the referendum was a democratic process and did not change the economic situation in Italy and the situation of Italian banks. The European Commissioner for economic and financial Affairs Pierre Moscovici said that it was possible to avoid the Euro crisis. He entirely rejected the idea, according to which the European Commission contributed to the anti-European sentiment among the Italians by requiring the implementation of proposed reforms from the government of Italy. “Italy is a strong and reliable country,” said the Commissioner.
However, the Financial Times notes that “during the referendum, the Italians had the opportunity to give vent to the resentment caused by the economic stagnation in the country.”
The economic situation in Italy, anyway, will be crucial during new elections to the Parliament. And today, as we see, the opposition has a lot of very significant economic arguments.
Elena Putalova
Translated from Russian by Daria Shushpanova
