Italy’s Bank Failures – Triggers the end of the EU?

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Tory Party Conference - Anti-Austerity March from the Daily Mirror - October 2015

Bringing Martial Law – to a town near you…

Controversial, I know. But is it really so far-fetched?

Regular readers of this blog, know the European Union (EU) is in a slow motion car-crash, economically speaking. The EU is an economic union made up of 27 countries, plus one heading for the exit. It was put together as the Iron, Coal and Steel Federation in the aftermath of World War II to keep European countries from going to war with one another – again. Its 6 founding members were – Germany, Italy, France, and the three Benelux countries of Belgium, Netherlands (Holland) and Luxembourg. Later, over time, the EEC as it became, grew as Denmark, Spain, Portugal, Greece, Britain and Ireland joined.

Still further on, after the fall of the Berlin wall, it turned into the world’s biggest economic union – the EU as all the former soviet satellite nations became members, in a grand experiment. And, right now, that experiment is going awry.

As you know, Britain voted to leave the EU on June 23rd, which sent shock-waves through the world economy. The “Brexit,” as the journos characterized it, shook financial markets from London to, Frankfurt, to Paris, to New York. It knocked more than $3 trillion from the global stock markets over the following weekend.

Then, things calmed down. Since, global stocks have gained more than $4.5 trillion. The S&P 500 and Dow just hit new all-time highs. Many folks now think things are OK in Europe.

As you will see, things aren’t fine. That’s because Europe now has a bigger, a MUCH bigger problem than Brexit. There are many in the media, who are trying to blame Britain’s current economy on Brexit vote, but in reality, Brexit is a symptom of a much bigger crisis, slowly unfolding.

Italy, Europe’s fourth biggest economy, is slowly crumbling into a full-blown banking crisis.

This isn’t just a problem for Italy. It’s a serious issue for the whole of Europe. Italy’s banking crisis could trigger the end of the EU as we know it. Italy’s banking system is a disaster…

The Financial Times (FT) reported:

“The amount of gross non-performing loans held by the [Italian] banks increased 85 per cent to €360bn in the five years to 2015…

The total stock of bad debts — the most distressed part of the pile — more than doubled over the same period.

Non-performing loans, or “bad” loans, are loans that trade for less than book value.”

According to the FT, non-performing loans currently make up 18% of all of Italy’s loans.

To put that into perspective, at the height of the 2008–2009 financial crisis, U.S. banks had a non-performing loan (NPL) ratio of just 5%. In short, Italy’s banking system is sitting on barrel of gunpowder, smoking a cigarette.

On Friday 22nd, The Wall Street Journal (WSJ) told us how Italian banks got into this mess:

“Bad loans have grown at the astounding pace of €50 billion ($55.05 billion) a year since the 2008-09 financial crisis as banks resisted writing down bad assets. Banks and policy makers awaited a strong economic recovery that would allow debtors to repay more of their loans while providing banks greater profits to cushion write-downs. The recovery didn’t materialize, and the money injected into banks, up to €80 billion, via periodic market recapitalizations quickly dissipated as bank profitability stagnated due to an inefficient, fragmented financial system and near-zero or negative interest rates.”

In other words, Italy’s banking system has three big problems…

1) The banks never really recovered from the financial crisis;
2) Italy’s economy isn’t growing anywhere near fast enough;
3) Negative interest rates at the ECB, are killing their biggest banks.

A few readers will know that negative interest rates are a radical new central banking policy. They basically turn bank accounts upside down. Instead of earning interest on money at the bank, the account holder pays the bank to watch their money.

The European Central Bank (ECB) introduced negative interest rates almost two years ago, hoping this would “stimulate” Europe’s economy by encouraging lending. Today, the ECB’s key deposit rate is -0.4%. That means European’s largest banks must pay €4 for every €1,000 they keep with the ECB.

That might not sound like much. But it’s a huge problem for some of Europe’s banks that oversee trillions of Euros. According to Bank of America (BAC), European banks could lose as much as €20 billion per year by 2018 if the ECB keeps rates where they are.

As a result, Italian bank stock prices have plumetted…

UniCredit SpA (USG.MI), Italy’s largest bank, plunged 63% over the past year. Intesa Sanpaolo (ISP.MI), Italy’s second biggest, is down 45%. Banca Monte dei Paschi di Siena (BMPS.MI), Italy’s third biggest, is down 83%. And Banco Popolare (BP.MI), Italy’s fourth biggest, is down 79%.

BMPS, if you read “The Coming Battle”, was implicated in another scandal, some year’s back involving Federal Reserve Treasury Bonds held by a former Chinese Dynastic family known as the “Kuomintang” or colloquially as “The Dragon Family”, which essentially meant the U.S. Federal Reserve got 50,000,000 ounces of Silver for nothing but a few pieces of paper and ink. But, I digress.

These are giant declines. Remember, we are talking about the bastions of Italy’s financial system.

Right now, these stocks aren’t telling us everything is OK. They’re saying Italy’s banking system could be insolvent and are facing their own “Lehman moment” Will this, if it happens with a sudden stock-market decline, trigger the Deutsche Bank collapse, I’ve mentioned previously?

ECB to bail out Italian banks?

On Thursday (21st July), Mario Draghi, who heads the ECB, said he would support a public bailout of Italy’s banks “in exceptional circumstances.” If this happens, the government will give money to Italy’s troubled banks and make taxpayers pay for it, but they first have to show that the private sector would do that. The trouble is, the stock prices are telling their own story…

If this sounds familiar, it’s because the U.S. government did the same thing during the 2008–2009 crisis. It gave hundreds of billions of dollars to the largest U.S. banks because they were “too big to fail” – (too big to jail?) They also clandestinely, loaned $15 TRILLION, to 30 of  Europe’s Biggest Banks, to inject liquidity, at 0%. The average American ended up footing the bill. As a result, Italian bank stocks jumped on Draghi’s words…

Banco Popolare (BP:IM) on Friday rose from €2.37, to €2.43. UniCredit rose 2.1%. And Banco Monte dei Paschi di Siena closed the day up 1.8%. In other words, investors are betting on a bailout, and that’s because Europe doesn’t have much choice.

It is now fairly obvious, the ECB will find some way to bail out Italian banks. Italy’s economic weight is too big. A collapse of the Italian banking system is a real threat to the Euro, and probably the whole EU project.

But, I don’t think a bailout will fix Italy’s problems. At best, it will buy Europe some time.

Let me explain:

A bailout won’t fix Italy’s main problem, because the country hasn’t had any meaningful economic growth since it joined the Euro in 1999. In fact since the emergence of the consumer society, and the predominance of the Service Sector in western economies, no major economy, has experienced rapid economic growth, suggesting the current economic model is flawed, and we will need to start again. How do you serve dinner faster at an old people’s home, unless you put the nursing assistant on skates?

But, even if a bailout can postpone a collapse of Italy’s banking system, it won’t prevent a bubbling political crisis.

You see, right now, Beppe Grillo’s M5S (Movimento 5 Stelle) a populist party in Italy, is gaining control. According to polls, it’s the most popular party in the country. And it’s gaining followers by the day. The party is against Italy’s ruling elites, and is generally thought to be “anti-establishment”. In fact in a meeting between Grillo, and Matteo Renzi – before he became Prime Minister – in April 2014, Grillo even refused to allow Renzi to speak, talking over him, saying he wasn’t prepared to engage with him, in a democratic way, because Renzi was a tool of the elite – according to Grillo.

M5S blames Italy’s economic problems on the Euro and immigration from south of the Mediterranean. Grillo, wants Italy to go back to the Lira, its old currency. Some think the party could even rise to power as soon as this October…(perhaps the SHTF moment?)

If this happens, Italy will likely hold a referendum like the UK did. But, this time, Italy will decide if it wants to stay in the Euro or go back to the Lira. If Italy votes to leave the Euro, the fallout could be far worse than what happened with Brexit.

Italy leaving the Euro would destroy confidence in the currency. and this could be devastating for the project. Like all paper currencies, “confidence” is all that backs the Euro.(Unlike Gold and Silver, which have intrinsic value) If people lose faith in the Euro, it will literally become worthless, and this could happen sooner than most people think. Which is why, those Bankers are trying to get rid of Cash, so that in extremis, every transaction is monitored, controlled and entered onto a ledger in a computer somewhere, so that Governments can grab a slice of every transaction, and thus pay back the debt encouraged by those “Too big to Fail” banks. Of course they won’t tell you that though.

But it also means they can fire those tellers working on Bank Desks, and make even more in their annual bonuses, while all they are doing is shuffling electrons around on a large computer network, because, they’ve also got Bitcoin, and the other digital payment methods snapping at their heels.

However, Italy, in 2015, was the 4th largest economy in Europe, and in the G8 of world economies. If it leaves the Euro, it would probably be the beginning of the end. I think it could destroy the currency. Without the Euro, the economic linkages between EU countries would weaken. This could be a fatal blow to the EU itself.

Bottom line, the Euro and the whole EU project could very well die in Italy over the next six to twelve months. This would be “the biggest geopolitical event since World War II” – even bigger than Brexit… It could trigger a global stock market crash. It could drag the world deep into depression. It could even spark a global currency crisis. Of course, there’s no way of knowing exactly what will happen. But, as I’ve said before, the EU is one of the biggest economic experiments in history. As many see it, the Bankers put the cart before the horse.

In reality, you need a political and perhaps even a linguistic union before you can hope to have a financial union, because in order to stop one part of the economy from over-heating, forcing up the local currency, or one part of the economy turning down, you need transfer payments, which can only be tolerated if those in the successful parts are willing to at least in part subsidize the poorer areas. The Barnett formula in the UK, was a way of ensuring those in Scotland, Wales and Northern Ireland received more per head from central government, than they otherwise should, from its inception back in 1978 to the present day. The name for the formula comes from the politician – Joel Barnett, who was Chief Secretary to the Treasury and who created it, and it has remained in effect ever since. Of course those areas also receive huge sums from the EU, hence their decision to remain by and large, but this means taxation controlled centrally, with political (democratic?) oversight..

So, the EU, needs a similar political process, but with separate governments, separate political systems and separate historical political leanings, that becomes difficult to enact into legislation and to manage, because it would probably mean Germany, Holland and the industrial heartlands of Northern Europe, subsidizing the rest – particularly the Mediterranean nations. So, a parliamentary union with democratic accountability would be required. But the elite don’t want to allow us ordinary people to decide how our government’s are made up, hence the current technocratic structure.

So, if we are not to be given the vote. We have little control over how the money is raised, and or spent, which means they can just decide to bail themselves out once more, and charge the subsidy to the rest of us. Even though, the European Union has already legislated to ensure that bank bail-outs don’t happen again, the Banks are supposed to behave like Cyprus, and seize their client’s money, raise capital on the markets, and/or shareholders. If you have a large sum, because you have just sold a house, won the lottery or sold your family heirlooms, then your capital and even your salary payments are at risk – you are an unsecured creditor to essentially a computer network, with an armed police force to back up the taxation threat…

If that worries you, then you need to protect yourself. Your first step should be to own Gold and/or Silver. As I’ve often said, Gold unlike any other substance, is real money. It has protected wealth for centuries because it’s durable, divisible, fungible (one unit is the same as any other unit), a unit of account and widely adopted and recognised. Its value also doesn’t depend on any central bank or government. An ounce of Gold, will still buy you a nice suit or outfit, from Savile Row, just as it did a hundred years ago or probably a thousand years in the future.

If the Euro runs into problems as I expect, Gold’s value could shoot to the moon.

So, how does that lead to snipers on roofs?

If those in power, manage to rid the continent of guns, and a major financial crisis occurs, the ramifications of large-scale demonstrations, could lead to further polarisation, of people in politics. In France, “Le Front Nationale” (The French National Front) led by Marine Le Pen, daughter of Mari Le Pen, has been making major headway, and in recent elections has been getting 30% of votes, as many in France fear their loss of culture, and more competition for jobs. In fact she has already been promoting demanding a referendum leading to a French Exit – a so-called Frexit.

The elite fear losing grip on the situation, and just as Fascism took hold in the 1930s, a modern version could take root again. Just as Spain erupted during 1937 into Civil War, when Fransisco (General) Franco, the Nationalist leader, took on the communists and anarchists. A division in politics, we currently see being played out in the civil war, that has erupted in the British Labour Party as the grass roots wants one leader, but the parliamentary party has already made the decision to attempt to select a new more moderate leader, that they feel can win not just the support of the Labour supporters, but the wider public, in the next election.

This mirrors events in 1979, in the aftermath of the Labour defeat to Margaret Thatcher, and the Conservatives, when the party took a step to the left, which the Gang of Four – David Owen, Shirley Williams, Bill Rogers, and leader Roy Jenkins, found a step too far. The step put the Labour Party out of office for 18 years, until Tony Blair resurrected the party and made it electable again. (Only to kill any chance of retaining it, as the Chilcott Report has just proved)

The Labour Party’s division though is merely a symptom of a much larger division emerging world-wide,between those who have a greater understanding of economics that works, and those who have merely wishful thinking, but as Theresa May said in her opening statement upon taking up office, the disparities of recent years cannot continue. Either we all stand together or we fall alone.

And following the election of Mrs Thatcher, the price of Gold shot to the moon, as interest rates were raised to put a stop to soaring inflation, caused in part by lax fiscal policies. Even the Labour leader James Callaghan warned the party as much in the party conference in 1976, when he appeared in Blackpool and issued his now famous rebuke to the party.

You have been warned.

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