The cards have been tipped, and it appears Italy’s Prime Minister may have been right.
In the aftermath of Brexit, much of the investing public’s attention has turned to Italian banks which are in desperate need of a bailout as a result of €360 billion in bad loans growing worse by the day (and not a bail-in, as European regulations mandate, as that would lead to an immediate bank run) to avoid a freeze and/or collapse of Italy’s banking sector. This has pushed stock prices – and default risk – on Italian banks to record levels. So far Italy’s bailout requests have mostly fallen on deaf ears, as Germany’s political leaders have resisted Renzi’s recurring pleas for a taxpayer funded rescue. However, as we have alleged, and as the Italian Prime Minister admitted last week, the core risk for Europe is not just the Italian banking sector but the biggest bank of all in Europe: Deutsche Bank.
Recall last Thursday, when speaking at a joint news conference with Swedish Prime Minister Stefan Lofven, Matteo Renzi said other European banks had much bigger problems than their Italian counterparts.
“If this non-performing loan problem is worth one, the question of derivatives at other banks, at big banks, is worth one hundred. This is the ratio: one to one hundred,” Renzi said.
He was, of course, referring to the tens of trillions of derivatives on Deutsche Bank’s books.
Today, we got the most definitive confirmation yet that the noose is tightening not only around Italy, but Germany itself (where as we reported on Thursday, Europe’s Bank Crisis Arrives In Germany as €29 Billion Bremen Landesbank On The Verge Of Failure) when none other than David Folkerts-Landau, the chief economist of Deutsche Bank, has called for a multi-billion dollar bailout for European banks.
Speaking to Germany’s Welt am Sonntag, the economist said European institutions should get fresh capital for a recapitalization following a similar bailout in the US. What he didn’t say is that the US bailout took place nearly a decade ago, in the meantime Europe’s financial sector was supposed to be fixed courtesy of “prudent” fiscal and monetary policy. It wasn’t.
As Landau says the US helped its banks with $475 billion dollars, and such a program is now needed in Europe, especially for Italian banks. In other words, just because the US did it, now it’s Europe’s turn to ask for more of the same.
“In Europe, the bailout does not need to be so large. A €150 billion program should be enough to help European banks recapitalize,” said David Folkerts-Landau. He adds that the decline in bank stocks is only the symptom of a much larger problem, namely a fatal combination of low growth, high debt and a “dangerous” deflation.
“Europe is seriously ill and needs to address very quickly the existing problems, or face an accident,” said the chief economist.
The Deutsche Bank expert said he is particularly worried about Italy and the condition of local banks, where the €40 billion in funding needs is said to be “conservative.” He said that the bank bailout is so urgent that it should permit Europe to violate the bail-in rules of the new Banking Directive. The economist notes that such a bail-in is not doable and is politically unfeasible because it would hit people’s savings and may cause a bank run in both Italy and elsewhere. We find it strange how nobody thought of this before the rules were implemented, or rather how impairing savings was only a problem when “second-rate” European citizens such as those in Cyprus and Greece were affected. Now that Italians and even Germans are in the cross hairs, suddenly “it is time to change the rules.”
His conclusion: “Strictly adhering to the rules rules would cause greater harm than if they were suspended.”
Our only question is whether Deutsche Bank’s chief economist is more worried about the future of Italy’s banks, or that of his own employer.
In the meantime, we look forward to the next pan-European bank bailout, now that even Germany’s biggest bank has thrown in its support behind the proposal, which means Merkel and Schauble’s resistance will promptly evaporate in the coming days as insolvent banks across Europe once again get rescued by taxpayers, in the process further escalating populist anger at the treatment of banks, leading to more Brexit-like events and the further fragmentation of Europe.