Fear over contagion from Italy's bank meltdown spreads in Europe

[marmar]

By Don Quijones, Spain & Mexico, editor at WOLF STREET.


Contagion is the reason Italy’s banking crisis is all of a sudden Europe’s biggest existential threat. Greece’s intractable problems are out of sight, out of mind; Brexit momentarily spooked investors and bankers; but Italy’s banking woes have the potential to wipe out investors and undo over 60 years of supranational state-building in Europe.

The last few days have seen growing calls for taxpayer-funded state intervention, a practice that was supposed to have been consigned to the annals of history by Europe’s enactment of new bail-in rules on Jan 1, 2016. The idea behind the new legislation was simple: never again would taxpayers be left exclusively holding the tab for European banks’ insolvency issues while bondholders were getting bailed out. But even before the new rules have been tried out, they are about to be broken, or at least bent beyond all recognition.

A loophole has already been found in the rules that would allow the Italian government and European authorities to raid European taxpayers in order to prop-up Italy’s third largest publicly traded bank, Monte Dei Paschi, while leaving bank bondholders and creditors whole, as Reuters reported a few days ago:

The rules, which have been in force since January, allow a state to directly acquire a stake in a bank that fails a stress test and cannot raise capital in the markets because of “a serious disturbance” in the domestic economy.

Oh, and no bank is officially allowed to pass or fail the European Central Bank’s 2016 stress tests, as we reported a few months ago, after a number of banks, including nine Italian banks, failed the test in 2014. Clearly, those at the top of the financial pecking order — banks and their bondholders — are protected once again from the disastrous consequences of another market meltdown, one that in many ways they precipitated. ................(more)

http://wolfstreet.com/2016/07/10/contagion-from-italian-banking-meltdown-apart-french-german-banks/

[Warpy]

1. Scary because it's not isolated

Deutsche Bank and Barclays are also looking a little shakier these days.

It will be fascinating to see what happens with the former, they're the outfit holding most of Trump's paper. If they really start to totter, you can bet they'll try to call some of it in.

ETA: http://www.economist.com/news/finance-and-economics/21576407-bank-supervisors-are-quietly-forcing-deglobalisation-finance-great

"The Great Unraveling" is so apt. All the big banks worldwide are so interconnected that if one fails, the rest will start to unravel, like that stray piece of yarn you shouldn't have started pulling on that old sweater.

[roamer65]

2. I am seeing reports of runs on the ATM's in Italy.

Just like it started on Cyprus and in Greece.