The Italian government has announced the potential costs of the bailout of the two Veneto banks, up to €17 billion--and this is a cost that we really must put down to the entirely dreadful economic effects of the euro. Here I don't mean the manner and method by which said government has had to sort out these banking problems, rather, what caused the banking problems in the first place. Which really is the economic stagnation in Italy caused by the membership of the euro. The country has had near no cumulative economic growth for a couple of decades now and that's just not something which a fractional reserve banking system will react well to.
As I said last week the two banks are to be wound down:
The European Central Bank pulled the plug on two troubled Italian banks, sending them into insolvency proceedings and pushing ahead with efforts to clean up weak banks holding back the economy.
The two banks, Veneto Banca and Banca Popolare di Vicenza, have struggled to overcome high levels of loans that were not being paid back.
Today we've the details of how the bailout is going to work:
Italy began winding up two failed regional banks on Sunday in a deal that could cost the state up to 17 billion euros ($19 billion) and will leave the lenders' good assets in the hands of the nation's biggest retail bank, Intesa Sanpaolo.
The government will pay 5.2 billion euros to Intesa, and give it guarantees of up 12 billion euros, so that it will take over the remains of Popolare di Vicenza and Veneto Banca, which collapsed after years of mismanagement and poor lending.
That's the potential gross cost of course, the claim is that the net cost will be rather lower:
Italy's financial sector is plagued by an enormous surfeit of bad loans — loans that banks give people whose ability to pay those loans back is questionable and that have a high default rate as a result.
The total stock of nonperforming loans, or NPLs, held by Italian banks is estimated to be roughly €360 billion.
That's a whole lot of pain still lurking there in the banking system. Of course, given that this is the EU there are questions over whether this entirely obeys the rules or whether they are being bent:
The drawn-out handling of the Veneto crisis has wider implications for Europe’s banking union, which aims to integrate oversight of eurozone lenders partly based on the assumption that private creditors would cover bank failure costs, rather than taxpayers.
The Italian state intervention to protect senior bondholders and big depositors runs counter to that principle but has been allowed because the banks’ liquidation means there are no competition issues.
This is one of the things I really dislike about the EU system of governance. Lots of rules, rules about near everything, but all can be bent for political reasons.
But the big question is, well, why is the banking system in such a mess? Monte dei Paschi, Unicredit found itself with problems, there's that €360 billion apparently lurking, what's the cause of all of this, over and above these two Veneto banks? The answer is the euro itself:
So, the basic problem. The Italian banks are sitting on those vast bad loans. They're not bad because they went on an ill advised lending spree or anything, they're bad loans because the euro has meant that Italy has had basically no economic growth in a decade, possibly more (no, this is not, absolutely not, all about the Great Crash). Italy's economy simply cannot cope with the fiscal and monetary policy strictures of euro membership. That's why there's been no growth. And a static economy will turn loans bad because of course there's always an expectation that the economy will grow built into any lending model.
You can just about argue that some version of the euro was a good idea. Benelux and Germany say, they pretty much did have a common currency already. But of course no European Project is going to get off the ground without France being a part of it and that's where it started to go wrong, the French economy just isn't in sync with the German one and arguably never will be. But once that wall of good sense was breached the system went on to include everyone who wanted to. Thus the problems in Greece of course. And Finland has suffered badly, through no fault but just being out of sync again. The Irish and Spanish property booms properly belong to the euro as well, interest rates were much too low for those two economies. And Italy as well, that lack of growth over that decade and more is simply because of euro membership. All of these things are just evidence of the fact that the euro is not an optimal currency area. Thus it should not have become a currency area.
The Italian government has sorted out these two Veneto banks at a potential cost of some €17 billion. That's a cost we should assign to euro membership--and then start to consider how much higher those costs are going to get.
