An Italian pensioner committed suicide this week. He hanged himself after the Italian government’s rescue of four small banks wiped out his life savings. The bailout was carried out under the principles which governed Cyprus’ bailout. All of the stakeholders in the bank, including depositors, were at risk in the banks’ failure. These were small banks, so the reality of what was happening did not strike home immediately. This man’s suicide did. Italian consumer protection groups, Adusbef and Codacons, have demanded a criminal investigation into the case.
This suicide and subsequent reaction by consumer defense groups mark the first glimmer of growing public concern over the security of bank deposits in Italy. As tensions grow between Italy and the EU over the country’s banking system, as well as the Italian government and domestic public pressure, conditions will come closer to realizing Geopolitical Future’s 2016 forecast of a banking crisis in Italy.
The Italian banking system is in serious trouble, and the failure of these four banks is simply the tip of the iceberg. Non-performing loans, loans that debtors are not paying off as agreed, but which have not yet been written off by the banks, have been rising. At this point 18 percent of all outstanding loans in Italy are non-performing. That is an extraordinarily high level, particularly when you consider that Italy is the eighth largest economy in the world and the fourth in Europe. Other countries like Slovenia or Ireland have similar levels of non-performing loans, but the consequences of a banking crisis in those countries would be less globally significant.
The origin of the problem is in two parts. The first is Italy’s high unemployment rate, particularly concentrated in the south. The numbers have not surged but the problem is that they have stayed steady. That means temporary unemployment has become a permanent condition for many, savings have been used and people’s ability to repay their loans is compounded by their inability to buy Italy’s products. That, coupled with the ongoing economic malaise of the eurozone, have hit Italian businesses hard, and corporate non-performing loans have surged. Europe cannot remain in its current economic condition indefinitely without addressing the problem of non-performing loans and troubled banks. They will deplete reserves and in some cases force them to end operations and that starts a cascading financial problem. The problem builds and builds and one day the dam breaks.
The dam has sprung a leak with four small troubled banks: Banca delle Marche, Banca Popolare dell’Etruria, Cassa di Risparmio di Ferrara and Cassa di Risparmio di Chieti. After initial recovery efforts failed, the Italian government passed an emergency decree to set up a new system to essentially bail out these four banks. The bail out was what might be called a bail-in. the banks were saved as institutions, but the stakeholders, including our elderly suicide were not protected from the consequences of their folly—in this case depositing money in a bank account.
The Italian bank rescue was initiated before the European Union’s bank ‘bail-in’ regulations come in to effect on Jan. 1. Under the new rules, bank shareholders, bondholders and depositors with more than 100,000 euros ($109,000) will have to bear losses before public money can be used to prop up a bank. Under the European bailouts, depositors with more than 100,000 euros in the bank are to be treated as if they were lenders to the bank rather than as if they were conventional depositors. 100,000 euros is a lot of money, but not if that is what you have to show after a lifetime of work and savings, or if you are a business, small or otherwise.
This is pretty much the same approach that was used in Cyprus, and its economic consequences were devastating as moderate size business’ lost their operating reserves, salaries could not be paid, rents and mortgages could not be paid and so on. It created a cascading crisis. It avoided the need to bail out the banks, at the practical cost of ravaging business operations. The EU’s position at the time was that that Cyprus was a unique case and should not be taken as a model for future actions.
It may have been a unique case but its uniqueness is dissolving. The strategy followed by the Italian government and laid down as operating principles by the EU starting in a few weeks basically says that depositors in banks are not going to be excluded from the haircut, and they should not see their deposits as loans. As such they need to investigate the banks as a lender would before putting money in. Most of us don’t have the resources and experience to do that, and that includes moderate size businesses. Banking is about to get risky and complicated in Europe.
The suicide publicizes the loss of personal savings as casualty of Italy’s frail banking sector, thereby giving the Italian public a tangible reason for questioning the security of their deposits. It’s worth noting that Italian press reports that the pensioner sought to withdraw his savings months before the “bad” bank rescue plan was approved and was blocked.
This puts in motion another new dynamic. If banks are likely to refuse withdrawals and the government will not protect those deposits, withdrawing money from any troubled bank is a good idea, and doing it before there is a problem is a good idea. But which banks in Italy — or in Europe — are sufficiently troubled to pose a problem. Most depositors don’t know and the reward of having the money in a bank does not compensate for the risk. Particularly in Italy, with 18 percent of all loans non-performing, identifying the banks that may one day stop honoring withdrawals is not easy for experts, let alone the rest of us.
The logic here, driven by NPL levels, the emotional impact of this suicide and common sense will be to assume that the risk level is sufficiently high, and the variables unknown or even not entirely honestly stated, that keeping more than 100,000 euros in an Italian bank is a chumps game. We say Italian because of the NPL rate and some minor failures already on the books. But in a way it applies to all of Europe. And that calculation could speed up a financial crisis by compounding NPLs and declining reserves with an outflow of cash. We have forecast that there will be an Italian crisis, but this event and the newly-implemented EU regulations can only speed it up or even trigger it.
This happening in the world’s eighth largest economy has ramifications that tower above Cyprus. But they also threaten to generate a political backlash against the government and the European Union. At a time when the immigration refugee crisis has already eroded confidence in the EU, adding this regulation to the pot, while presumably a reasonable precaution, will raise serious questions about living in an EU defined world. However, leaving that aside, the fact is that the Italian banks are troubled, dramatic steps were taken in solving the problem that ruined at least one life, and will likely ruin more. And given the numbers, this is not over.