Teutonic Angst Rises As Italian Banks Fall

Germany still wary of getting to involved with Italy after...you guys remember.
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By Pava (Own work) [CC BY-SA 3.0 it], via Wikimedia Commons

By Pava (Own work) [CC BY-SA 3.0 it], via Wikimedia Commons

Last month, the Germans magnanimously decided not to eviscerate Greece and display its indebted entrails in the four corners of the European Union as a warning to others. But 2017 is a new year. Notably, it is a year in which German Chancellor and EU schoolmaster Angela Merkel must face the voters—and her stock with them is falling like, well, an Italian bank stock because Germans feel she’s been a little too nice to non-Germans, both within and without the EU. Given political realities, it’s not at all clear that she’s willing to give Rome the same pass she gave Athens just a few weeks ago when dealing with Italy’s adorable, mortally-ill Banca di Monte dei Paschi di Siena.

Germany, as de facto leader of the EU, is the main force behind the ECB’s opposition to bailouts. Germany has elections in 2017 and is also facing a looming crisis due to falling export demand. Politically and economically, it cannot keep propping up the eurozone.

The EU must walk a fine line of being flexible enough to avoid financial collapse, but stringent enough to preserve the union’s institutional integrity—at least what remains of it.

Merkel’s famously sharp-tongued and tightfisted finance minister, Wolfgang Schäuble, is certain that the Italians will do the right thing in the end and not force anyone to do anything drastic. After all, whenever have they done a thing like that?

The German finance minister said does not have “the slightest doubt” that Italy’s Economy Minister, Pier Carlo Padoan, will stick to his commitments as regards to the third bailout of Monte Dei Paschi.

Of course, there is another solution, one that Italy’s next government may gleefully reach for should Padoan do what Schäuble says he will. Enter “Exitaly,” which I hope we can all agree is much better than “Italexit” or “Itexit” or “exIT” or whatever other cutesy portmanteau might be coined for the next death throe of the EU.

“Italy is totally moribund. Yet, what we see at the moment is great efforts to help Italian bank bailouts. But the Italian banks are not the problem with Italy,” Edwards said at a conference in London on Tuesday….

“It’s a waste of time and effort to recapitalize the Italian banks, while Italy remains in the eurozone,” Edwards said….

“Italy never even had a boom and bust. At least Ireland, Spain, Portugal — they had a big credit party before they bust,” Edwards said.

“Italy didn’t have the party, just had the bust. At least France is crawling its way higher here, but Italy is right at the bottom. Italy has not grown basically since it joined the euro in 1999. Italy in my view will never grow within the euro. It’s as simple as that.”

On the bright side, things aren’t all bad. Sure, UniCredit, several orders of magnitude larger and more important than MPS, just ate an $8.5 billion loss. But unlike MPS, it was able to convince people it’s not in danger of imminent death.

Italy’s largest bank won permission from investors Thursday for a 13 billion-euro ($14 billion) rights offer -- almost as much as its market value -- to carry out a turnaround plan under Chief Executive Officer Jean Pierre Mustier. Shareholders meeting in Rome also approved the conversion of every 10 shares into one new share after the stock dropped more than 45 percent last year.

Italy, German, And The EU Are On The Brink Of A Conflict [ValueWalk]
Schaeuble certain that Italy will stick to bailout rules [New Europe]
Permabear Edwards: ‘Waste of time’ to save Italian banks [MarketWatch]
UniCredit Hit by $8.6 Billion Bad-Loan Charge [WSJ]
UniCredit Shareholders Back $14 Billion Cash Call in Revamp Bid [Bloomberg]

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