Italian PM Renzi May Be Going Ahead with Bank Bailout
July 18, 2016 (EIRNS)—Despite strong opposition from the European Commission bureaucracy and the German Finance Ministry—at least in public—it appears that Italian Prime Minister Matteo Renzi may be proceeding with his stated plan to bail many of Italy’s banks out of their bad debts.
Italy’s economy, with its strong role for industry and high-technology exports, has effectively been in constant recession and stagnation since the euro currency was introduced nearly 15 years ago, and that has worsened as the rest of Europe has sunk economically. Consequently Italian banks, which concentrate on commercial and household lending, hold a relatively very large volume of distressed and non-performing loans (reportedly a huge 18% of their assets), and a blowout of the banking system is looming as part of the threatened collapse of the entire London-centered European financial system.
The July 16 London Telegraph reported, in "Italy on collision course with Brussels over €50 billion bad bank bailout plan," that Renzi’s government has engaged JPMorgan Chase bank, which has drawn up a plan for the bailout.
"It is understood that €10 billion of public money could be used to buy bad loans at a knock-down price, taking assets with a face value of €50 billion off the banks’ hands, allowing them to start giving out more good loans instead."
The government "bad bank" would reportedly buy the loans at roughly 20 cents on the dollar and try to renegotiate them with the debtors. Some banks, thus taking a loss of about 80% of these loan assets, would need to be recapitalized with additional investments from the government’s €50 billion plan.
"The scheme, which is being put together by JP Morgan, could help clean up the banks, but also puts the country’s authorities on a collision course with the EU, which does not want taxpayers bailing out banks before private investors take a hit,"
reports the Telegraph.
But not only would millions of Italians who have invested in bank bonds take that hit, but also major French and German banks — already in trouble—to the tune of tens of billions of euros.
When Renzi first proposed the plan, EIR Editor and American System economist Lyndon LaRouche recognized it as a necessary—but far from sufficient—step to allowing a European economic and productive recovery.