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Italy’s Banking Crisis

As Europe struggles to understand the fallout of Brexit, there is a real crisis brewing. A very large and real concern in Europe are non-performing loans sitting on Italian banks balance sheets. These loans represent roughly 17% of the market which equates to €400 billion (at today’s exchange rate comes to 25% of Italian GDP!).  The future for Italian banks will either be a bail-in (think what happened to Cyprus depositors) or a bail-out which is harder under EU guidelines.  The bail-in is, of course, a formula for bank runs.  And this will not only affect Italy.  Italian loans are packaged and resold as others, and Italian banks take loans from other European banks. These banks in turn have borrowed against Italian debt. Since Italy is the fourth largest economy in Europe, this is the mother of all systemic threats.

There is another European economic crisis brewing.  Germany derives nearly half of its GDP from exports.  Their prosperity depends on their ability to export and that the ability to export depends on the effective demand of their customers.  Germany exports heavily to the EU, and the Italian crisis, if it proceeds as it is going, is likely to cause an EU-wide banking crisis, and an even greater weakening of the European economy. That would cut deeply into German exports, slashing GDP and inevitably driving up unemployment.

Below are two well written out explanations of the issues affecting Europe and Italy by John Mauldin and George Friedman which are worth reading.



Europe is a Minefield – John Mauldin

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Italy & Systemic Failure – Geopolitical Futures

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Best Regards,

Jared Toren
CEO & Founder
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