In the final weeks of 2016, the Italian banks’ saga threatened to unsettle the euro area. The failure to implement a market recapitalization of Monte dei Paschi di Siena (MPS) led to a sizable state intervention. Public money was necessary to soften the impact of the bank’s resolution for thousands of depositors who, mostly unaware of the risks, had bought—or sometimes were fraudulently sold— subordinated MPS bonds intended for professional investors. A number of other pending problems in the Italian banking sector made analysts posit a potentially hefty price tag for the Italian government if the rest of the domestic financial system needed to be shored up. Given the high level of Italy’s public debt, such an extraordinary intervention would have put its sustainability at risk. Some analysts even doubted Italy’s permanence in the euro.
As was the case many times over the past eight years, ever since the Lehman crisis erupted, the dreariest outlook proved to be off the mark. Nevertheless, the Italian banking saga is far from over, and it would be damning for Italy, and the Euro area as a whole, to try to shove it under the rug. For Italy, it would be particularly important to come clean on what turned many banks from profitable firms into lemons in the turn of a decade. A relatively solid Italian bank (UBI) is in the process of buying three other minor institutions (Banca Etruria, Banca Marche, and Cassa di Risparmio di Chieti) for the symbolic price of one euro, less than an espresso. The acquired banks were active in the heart of rich Italian regions. Two, in particular, were lending money in two provinces where average income remains among the highest in Europe. Part of Italy’s industrial backbone, these regions made the country the second largest manufacturer in Europe. In 10-15 years, profitable and well positioned banks managed to become worthless.