Italian banks: It’s Rome’s turn to confront Berlin’s aggressiveness

Rome, Chigi Palace, Prime Minister’s residence. PM Paolo Gentiloni delivered the traditional end of year Press conference on 29/12/2016. (Italian government work, only some rights reserved. Foto: T. Barchielli).

Rome, Chigi Palace, Prime Minister’s residence. PM Paolo Gentiloni delivered the traditional end of year Press conference on 29/12/2016. (Italian government work, only some rights reserved. Foto: T. Barchielli).

Italy, after Greece, is now the next target of the archetypical Teutonic aggressiveness, aimed this time at making the life difficult for Paolo Gentiloni the new Prime Minister. The problems Rome has with the country’s banking system are being exaggerated and used by Berlin to either pave the road leading outside the euro area or turn the country into an impoverished, obedient and second rate euro area member. It’s difficult to say which is the real target of Wolfgang Schäuble, the powerful Federal minister for Finance and ‘spokesman’ of the inner German state.

Right after Gentilioni and his minister for Finance, Pier Carlo Padoan, painstakingly managed to put together a plan to support the country’s ailing banking system with €20 billion of borrowed money, last week, behind the scenes, Berlin rushed to officiously demand more. The dirty job was carried out by Sabine Lautenschläger, Vice-Chair of the Supervisory Board of the Single Supervisory Mechanism, the watchdog of the euro area’s banking system. She was seconded by Clemens Fuest, official adviser to Angela Merkel’s government and head of Ifo, Germany’s heavy duty economic institute. Ifo authentically expresses the Teutonic version of the economic theory, the one which maintains that only “arbeit” matters in this futile world. But let’s start the story from the beginning.

The destitute Italian banks

Italy, apart from its government over indebtedness – ranging from anything between 130% and 140% of GDP – also suffers from a serious disease, which plagues its banking system. It’s the worst case of a European syndrome, rendering the banks unable to deal with their non performing loans (NPL) without support from the state. In the Italian banking system, the NPL account has reached a round sum of €340bn, of which nobody knows what part has to be written off. During the last week of 2016, the Parliament in Rome authorized the government to borrow another €20bn and use it to save the ailing lenders with analogous capital participations. Two years ago, the government rescued four smaller banks (Banka Marche, Cari Ferrara, Cari Chieti and Banka Etruria), through a draw of €3.6bn from the country’s deposit guarantee scheme.

It’s an open secret that the Italian government finds itself in a very difficult position too, when it comes to borrowing and debt servicing. So, this new fund of €20bn may be the ceiling of Rome’s abilities to help the banks write off what is needed of the NPLs and recapitalize them as well. Understandably, the larger the write off of NPLs, the larger the recapitalization needs and the larger the need for government support. So, it must be stressed that, with the above mentioned fund of €20bn, the over indebted Italian government has exhausted its abilities to borrow more in order to help the banks. At this point enters Sabine Lautenschläger a German ‘frau’, Vice-Chair of the Supervisory Board of the Single Supervisory Mechanism (SSM) since 2014, working under the roof but not the authority of the European Central Bank.

The German ‘frau’

Sabine, a German Federal government apparatchik was deputy president of the Deutsche Bundesbank from 2011-2014 (the central bank of the country) and before that she was Chief Executive Director of the Banking Supervision of the Federal Financial Supervisory Authority of Germany (2008-2011). And all that during the period in which Schäuble has been the absolute ruler of the German ministry of Finance.

No wonder if Sabine is of the same mentality as her boss, or even if she continues taking orders directly from him, despite the fact that she is now under the EU mandate not Germany’s. This German ‘frau’ then, from 2014 is a member of the independent bank supervision authority of the euro area, housed at the ECB. To be noted, that Sabine is currently also a Member of the Executive Board of the European Central Bank, a prerogative that Danièle Nouy, Chair of the Supervisory Board of the Single Supervisory Mechanism, doesn’t have, despite theoretically being Lautenschläger’s superior. This makes Sabine something close to chief executive officer of SSM, the euro area’s bank watchdog.

What Monte dei Paschi needs

Now, Monte dei Paschi, the oldest European bank and the Italian lender with the gravest NPL and capitalization problems, asked the government for a capital injection of €20bn from the fund. Sabine’s agency intervened and said dei Paschi needs at least €8.8bn in state aid in order to stand in its feet, despite the fact that this same agency only days before had estimated those needs at €5bn.

This €3.8bn increase in dei Paschi’s capital needs though, mysteriously reassessed by SSM, may derail the entire Italian government program to restore the creditworthiness of the country’s banking system. Both Prime Minister Gentiloni and his mister for Finance, Pier Carlo Padoan, have deemed the Sabine’s amplified estimation for dei Paschi’s needs, as non-transparent. Obviously, the two men are in reality accusing Schäuble of having secretly intervened to Sabine, asking her to swell the hemorrhage of the Italian government.

Italy and the Teutons

Last week, the second incident of a Teuton discharge against Italy came from Clemens Fuest, President of Ifo. With the weight of the Ifo President and official advisor to Angela Merkel speaking at an interview to the German newspaper Tagesspiegel, he said the Italians will soon want to leave the euro area…if their wellbeing doesn’t improve. As nobody expects the living standards in Italy to perk up in the foreseeable future, the German pundit actually predicts nothing less than the exit of Italy from Eurozone, the infamous Italexit.

Fuest also said that the German parliamentarians must reject a rescue plan for Italy, because it’s impossible to assess the risks involved. Reportedly, the risks involved cannot exceed some tens of euro billion, to be compared with the hundreds of billions Germany has gained from the existence of the EU and the Eurozone. In short, Fuest says let the Italians sail alone in rough waters, forgetting that the EU was initially built on the principle of cooperation.

Add to this instrumental German perception the fact that Schäuble has repeatedly tried to ‘purchase’ or even ‘bribe’ Greece to leave the euro area (Grexit) and the obvious conclusion is that, Germany longs for a euro area without the burden of the Southerners. It was like that from the very moment the last financial crisis erupted in 2008-2010.

The euro of their own

Understandably then, Germany clearly prefers a euro area of much lower risks. As the entire southern part of Europe is, by Teuton standards, a regular source of economic and even political problems and uncertainty, it seems that Germany and the Eurozone countries influenced by her are now demanding full compliance from the southerners or exit. And this, despite the fact that the creation of Eurozone helped Germany triumphantly recover from her ailing economic state of the early 2000s, then mocked as the ‘European patient’. Today, Berlin sees the south as a burden, thinning down the dollar value of the country’s huge euro reserves.

If such thinking finally prevails in Germany, the euro area will soon be in trouble. And this prospect seen together with the Brexit, may remind the shivering world of the WWII European schism.

 

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