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M. Messori: The Role of Banks in the Recent Italo-German Dispute

image-01/27/2016 - 15:02The debate between the Italian President and other European representatives (the European Commission President and German Chancellor in particular) has recently raised a number of disagreements, aided by multiple factors that, while impacting the entire euro area, have gained peculiar prominence in Italy. Although they have political and institutional components, these factors find their roots in economics. For this reason, it is worth focusing on the economics problems (specifically on the banking sector problems) that have shaped the Italian negotiating position in the euro area.

The problems that have weighed on the Italian banking sector in recent months, and that have been strengthened by the European process of creating a Banking Union, are too well-known to be worth repeating in great detail. Here, it suffices to recall four facts:
First, the transition from the international financial crisis to European crises transformed Italian banks from a virtuous case, which had not needed significant government assistance when compared to the banks in the rest of the European Union, into repositories for non-performing loans (NPLs). These NPLs have now exceeded €350 billion and are severely impeding the flow of credit to the 'real' economy.

After having rejected the opportunity to finance a "bad bank" with European funds in June 2012, a move that would have worsened Italy's debt-to-GDP ratio, the Italian government ran out of time to create one or several special vehicles to acquire NPLs at prices directly sustained by government guarantees. Thus, Italy is now subject to new European rules, put in place three years ago (see European Commission Communication C216, known as the "Banking Communication," published 30 July 2013), which prohibit direct state aid to banks in difficulty outside the resolution processes centered on the bail in. Only at the end of January 2016 is a compromise being worked out, one that risks not actually solving the problem since it does not reduce (or insufficiently reduces) the difference between the average values of NPLs as recorded in the balance sheets of banks and their average values if liquidated on the market. 

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This brief is an extended version of a note published (in Italian) on AffarInternazionali.