Why Italy could be the next European country to face an economic crisis
In the United States, we view the economic crisis that started in 2008 as something that ended years ago; the story now is the slow pace of recovery. But in Europe, the crisis genuinely hasn’t ended. Greece had a major debt crisis as recently as last year, and Spain is still suffering from an unemployment rate above 20 percent.
Last month’s vote for Brexit has led to a renewed flare-up of anxiety about the European financial system, and it looks like Italy may be the next European country to face a crisis. Italian banks have about $400 billion in bad loans on their balance sheets, and markets have started to panic. One Italian bank has lost 80 percent of its value over the past year, and observers worry that some banks could be on the verge of collapse.
Italy’s prime minister, Matteo Renzi, wants to use about $45 billion in Italian taxpayer funds to shore up Italian banks and head off an economic crisis. But his plan runs afoul of European Union rules, which prohibit countries from bailing out their banks without making the banks’ investors pay first.
This argument assumes that a bank’s creditors are wealthy, sophisticated financial institutions that understand the risks they’re taking on. But in Italy, that assumption doesn’t necessarily hold. According to Bloomberg, 45 percent of Italian bank debt is held by ordinary Italians. That means complying with the EU rules could mean some Italians lose a big chunk of their life savings.
Renzi got a taste of the potential backlash back in December, when the Italian government rescued four banks in accordance with EU rules. Creditors took losses in the process, and one of them was an Italian man who lost $110,000 he had invested in bonds issued by one of the bailed-out banks. The man killed himself, leaving a suicide note criticizing his bank.
Renzi is understandably reluctant to repeat this experiment on a broader scale. So he’s been lobbying EU leaders for an exemption from the EU’s anti-bailout rules that would allow him to inject cash directly into Italian banks. But European leaders are unconvinced. German Chancellor Angela Merkel, the most powerful EU leader, has refused to budge, insisting that it would set a bad precedent to relax the EU’s anti-bailout rules just two years after they were overhauled in 2014.
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