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Screenshot of a breaking news alert e-mail from Q2 2017
What happened to the shares and riskiest securities of European banks after Britain’s disturbing vote to leave the European Union – they plunged. So far the crisis is felt mostly in Italy.
Why did this happen to Italy?
Italian banks are saddled with about $400 billion of bad loans and lack the financial reserves to sell them off. The combined stock market value of UniCredit SpA and Banca Monte dei Paschi di Siena SpA, which are Italy’s biggest and third-biggest banks, has plunged by more than half this year to the slight amount of just $13 billion.
During the 2008 global financial crisis, banks in the U.S., U.K., Spain, Ireland and elsewhere were bailed out with taxpayer funds. Italy was not facing an immediate need to recapitalize its lenders. Instead the country waited for an economic recovery that unfortunately never came. The government this year sponsored attempts to recapitalize troubled banks and buy bad loans.
Prime Minister Matteo Renzi is now seeking to inject public funds. He rapidly needs to find a solution that avoids a bail-in, which would force bondholders and other creditors to take losses.
Most investors expect some sort of fudge, in which the EU approves further aid that’s well short of what Italy is seeking. But European officials have sweated away for thousands of hours devising complex rules for how to deal with failing lenders, and they may not be prepared to throw out the rule book just yet.