If This Happens, Italy’s Banking System Becomes “Insolvent”

Justin Spittler


Europe is “screwed.”

That’s what Steve Eisman thinks, at least. If the name rings a bell, it’s because Eisman was one of the few major investors who saw the last housing crisis coming.

He famously made a huge bet against the U.S. housing market. When housing prices tanked, Eisman pocketed more than $1 billion. The actor Steve Carrell played Eisman in the Oscar-winning film The Big Short.

A few weeks ago, Eisman hinted at his new big short: Italian banks. Reuters reported yesterday:

"Nobody is going to invest in the Italian banks unless they trust their balance sheets," said Eisman, adding that Italian lenders have been "very slow" to recapitalize and sell off troubled assets.

"In the Italian system, the banks say (assets) are worth 45-50 cents in the dollar. But the bid price is 20 cents. If they were to mark them down, they would be insolvent."

In other words, Eisman thinks Italy’s banking system is a ticking time bomb. And it’s only a matter of time before the “market” realizes this. He told the British newspaper The Guardian:

Europe is screwed. You guys are still screwed.

• Eisman isn’t the only one betting against Italian banks, either…

Reuters reported:

Data from the Italian market regulator shows "significant short positions" in Banco [sic] Popolare Di Milano and Banca Carige, while the regulator has restricted short-selling in shares of floundering Monte dei Paschi since July…

There is also evidence that investors have taken short positions in Italian government debt on a scale not seen since the euro zone debt crisis of 2011/2012.

• Bill Gross is worried about Italy’s banking system, too…

Gross is one of the world’s most respected investors. He founded PIMCO, one of the world’s biggest money managers, and now runs Janus Capital. You may also know Gross by his nickname, “The Bond King.”


This morning, Gross told Bloomberg that Italy is becoming a “basket case” due to its troubled Banks.

• In short, Italy is teetering on the edge of a Cliff…

If a banking crisis unfolds, Italians and people across Europe will undoubtedly suffer. But an Italian banking crisis could also reach you if you live on the other side of the world.

We’ll explain why today. We’ll also tell you about an event taking place two days from now that could set off a full-blown Italian banking crisis.

But let’s first look at why Eisman, Gross, and so many others are worried about Italy.

• Italian banks are in worse shape today than they were before the 2008–2009 financial crisis…

The Financial Times reported last week:

The woes of the banks stem from the Italian economy, which never recovered from the most recent crisis. Gross domestic product per head is 9 percent smaller in real terms than it was in 2007 and is stuck near the levels of two decades ago. Italy staggers under an ageing population and the second highest public debt load in Europe, at more than 130 per cent of GDP.

That’s not the only problem…

According to Business Insider, the country’s banks are sitting on €360 ($384) billion worth of impaired loans. About €200 ($213) billion of those loans are “non-performing,” meaning they’ll likely never be paid back.

For perspective, Italian banks have €225 ($240) billion in equity on their books. In other words, Italy’s banking system is drowning in debt.

• Italy’s biggest banks are seeking life support…

The Financial Times explains:

UniCredit, the country’s largest bank, is seeking to raise €13bn capital, and Monte dei Paschi, its most troubled large bank, may close a €5bn combined debt-for-equity swap and capital increase this week. But these sums are small compared with the system’s needs and the worst problems are concentrated in the smaller banks.

But there’s a problem. Italy’s government might not be able to stop its troubled banking system from collapsing under the weight of its own debt. The Financial Times went on:

If the government were to inject capital into the banking system, EU rules would require — at the very least — that subordinated creditors be converted to shareholders. This would be politically explosive.

Italian banks have long sold their own shares and debt to their retail customers as an attractive alternative to savings products, a disgraceful practice that should never have been allowed. It means that ordinary Italians, many in retirement, have already suffered as bank shares have fallen. They will suffer much more in a bail-in.

What’s worse, Italy is running out of time…

• Italy will hold an important constitutional referendum on Sunday…

If Italy votes “Yes,” Italy’s current government will stay in power.

If it votes “No,” a new radical government could rise to power in Italy. And MarketWatch reports this could trigger “a possible chain reaction of political upheaval, market instability and economic uncertainty.”

A “No” vote could also accelerate the banking crisis in Italy. Business Insider explained:

Now comes the nightmare scenario: If Italian premier Matteo Renzi loses his constitutional reform referendum on December 4, the markets may turn against Italy. The referendum asks whether Italy should reduce the power of its Senate and concentrate more power in Rome vs. the regions. A "yes" vote would make Italy's government less sclerotic. A "no" vote leaves the status quo in place.

Put another way, Italy’s government could have a tough time saving its banking system if the Italian people vote “No” two days from now. And, based on the latest polls, it looks like Italy will go in that direction.

• The European Central Bank (ECB) is bracing for the worst…

Reuters reported on Tuesday:

The European Central Bank is ready to temporarily step up purchases of Italian government bonds if the result of a crucial referendum on Sunday sharply drives up borrowing costs for the euro zone's largest debtor, central bank sources told Reuters.

The ECB could use its 80-billion-euro ($84.8 billion) monthly bond-buying programme to counter any immediate, further spike in bond yields after the vote, smoothing market moves and supporting bonds, according to four euro zone central bank sources who asked not to be named.

Unfortunately, emergency measures by the ECB won’t prevent an Italian banking crisis. At best, they’ll buy Italy and the rest of Europe time.

• We encourage you to take steps to protect your wealth…

The first thing we encourage you to do is own physical gold. As we like to point out, gold is real money. It’s preserved wealth for centuries and through every kind of financial crisis.

It will do the same if Italy’s banking system starts to unravel. The price of gold could even shoot through the roof if problems in Italy’s banking sector “daisy chain” across Europe and around the world.

• You can also turn this crisis into a money-making opportunity like Eisman and others have…

Some of our readers have already done this. That’s because Nick Giambruno, editor of Crisis Investing, made a bold bet against Europe in August.

He told his readers to short (bet against) the euro, the official currency of Italy and the rest of the European Union. In just three months, Nick’s euro short is up 13%.

But his readers could see much bigger gains if Sunday’s vote goes as expected.

Nick’s so convinced of this coming crisis that he recently doubled down on his bet against Italy.

This time, he shorted Italian government bonds. Like the euro, the value of these bonds could plunge if Italy’s banking system starts to crack.


Chart of the Day

Italian banks are buried under a mountain of bad debt.

Today’s chart shows the percentage of non-performing loans (NPL) for five of Italy’s biggest banks—UBI Banca, UniCredit, Banca Intesa, Banco Popolare, and Banca Monte dei Paschi di Siena. (Again, these are loans where the borrower has stopped paying the bank.) The column on the far left is the average NPL ratio for other European banks.

You can see that Italy’s banking system is in far worse shape than the rest of Europe. Its banks have about twice as many bad loans as the average European bank.

These efforts might postpone a banking crisis in Italy. But they won't fix Italy’s problems. You see, Italy’s banking system is broken beyond repair at this point. Like Eisman suggested, it’s only a matter of time before the rest of the world wakes up to this.




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