Could Italy set off a European Banking Crisis?

Video transcript:

Today is Tuesday 6th December 2016 and we are briefly addressing the question – could Italy set off a European Banking Crisis?

In our last 2 videos on the subject, entitled :

‘Renzi Resigns - End of the EU? - How does Gold and Silver React? ‘

And

‘Could Italy’s referendum destroy the EU and cause gold and silver prices to rise?’

We stated that the defeat and departure of Prime Minister Matteo Renzi threatened to plunge Italy into a new phase of political uncertainty and possible economic turmoil.

A crisis of investor confidence could indeed develop which may derail a rescue scheme for Italy's most indebted banks, triggering a wider financial crisis across the Eurozone.

So how bad is the situation?

Well, Italy's banks have an estimated €360bn worth of contaminated loans with limited easily realizable security on their books that for years they have been trying to restructure.

UniCredit, the country's biggest and most important lender, has been looking to raise as much as €13bn in fresh capital and offload €20bn in bad debts.

Most vulnerable is Banca Monte dei Paschi di Siena, the world's oldest bank and Italy's third largest, which has the most bruised balance sheet and which requires at least €5bn.

A market crash would make it much harder for these banks to raise fresh capital, especially if it rattles consumer confidence in Italy, triggering a run on deposits. It could leave the Italian Central Bank having to provide emergency support to the banks in the form of rescue loans.

Putting aside the EU rules on ‘bail ins’ which were put in place since the financial crisis which would oblige savers to write out cheques to help save the banks, robbing the economy of spending power and potentially further depressing growth; there would also be the potential of "contagion", due to the interconnectedness of the continent's banking system throughout Europe.

Unicredit, for example, owns Hypovereinsbank Germany's fourth or fifth largest bank.

Banca Nazionale del Lavoro, Italy's eighth largest lender, is owned by BNP Paribas, France's biggest bank, while Cariparma, the country's 11th largest lender, is owned by Credit Agricole, another French bank.

Deutsche Bank, Germany's largest bank, also has a substantial Italian subsidiary.

That said, some analysts believe that the bad news is already priced into the market, with shares of Italy's banks already having fallen by nearly 50% this year.

It is also being argued that the EU's rules on "bail-ins" should be relaxed on the basis that the European Central Bank is already spending €80bn every month on asset purchases to help support demand and bank lending across the Eurozone.

Just directing one month's worth of that funding towards propping up Italian banks would be more than enough to park the problem - but would, of course, antagonise taxpayers in countries like Germany and for that case the Netherlands.

It is certainly going to be a nervous time for market-watchers and investors. Nevertheless we do not believe this is going to spark the much heralded crisis many would have you believe. The SHTF scenario is extremely unlikely. The end of banks as we know it is not going to occur in 2016 nor do we believe in 2017 for that matter – there are plenty of contingency plans in place to smooth over these problems at least for the time being.

We do however see it as another obstacle for the EU to get over and another incentive to increase the momentum for those opposed to the Euro.

At the time of producing this video, gold stands at $1169 down just $8 from the start of the week and silver stands at $16.74 just down by 1 cent.

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Disclaimer:

Illuminati Silver owners come from a background of Banking, International Wealth Management and Economics. Having now retired from these worlds we are not qualified to give investment advice. Therefore, this and other productions must not be deemed to be giving such advice and merely represent the personal views of its owners.