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Italian banks appear to be in trouble. Again. With €360bn in non-performing loans – by far the largest pile in the eurozone, and behind only Greece and Cyprus as a percentage of all outstanding loans – the market has been selling off Italy’s financial sector since the start of the year to where it’s now down about a third of its value since January. But their troubles have become acute again because of the struggles of one mid-sized bank, Banca Popolare di Vicenza, to raise the €1.8bn in capital the European Central Bank has demanded.
The share sale by Vicenza is being underwritten by UniCredit, Italy’s only systemically important bank, but last week UniCredit sought government assistance out of fear Vicenza’s shares wouldn’t be bought by nervous investors – and UniCredit itself would be left holding the bag. That, in turn, raised questions about UniCredit’s own balance sheet, where it already lags behind many of its peers in terms of financial health.
The Italian government isn’t in a place to help, however. First of all, it doesn’t have any money to throw at the problem; its national debt is already nearly 140 per cent of economic output, the highest in the eurozone outside of Greece, and there’s not a billion or two around to spare. Secondly, and perhaps more importantly, if Rome did intervene, it would have to follow the EU’s new post-crisis banking rules, which require the government to force losses on private investors before any public money can be used to rescue a bank. Read more