by Michael Roberts
Italy has a referendum this coming weekend. Italy’s Blairite
(Clintonesque) prime minister Matteo Renzi of the ruling the centre-left
Democrats called a referendum, British Cameron-style, to ‘reform’ the
electoral constitution. He wants to reduce the size of the upper house
of parliament, the Senate, from over 350 senators to just 100 and also
have them come from the regions and cities, namely the elected mayors
etc. Most important, he wants to end the ability of the Senate to send
back policies or measures passed by the lower house assembly (elected by
popular vote in proportional representation – i.e. seats according to
the share of the vote). Thus, the Senate could no longer go on with
‘ping-ponging’ tactics back and forth with the lower assembly.
Renzi has staked his political reputation and his position as PM on
winning this vote, like David Cameron did in the UK over the Brexit
referendum. And, according to the opinion polls, he looks as though he
is heading for the same defeat as Cameron, throwing another major
capitalist state into confusion, uncertainty and paralysis.
But it is all relative – after all, Italian politics and the economy
have been in a state of paralysis for decades, with the situation only
worsening since the end of the Great Recession. Italy is now in a Long
Depression that it seems unable to escape from.
The immediate problem is Italy’s banks. Europe’s banks currently
hold €1trn of what are called ‘non-performing loans’, loans that the
borrowers are no longer paying interest on and could be about to default
on. Of that €1trn, around one-third is held by Italy’s banks. These
bad debts are like a millstone around the necks of Italy’s finance
sector. The myriad of small Italian regional and large national banks
have been lending to small businesses and property companies. But
thousands of these small companies are bust and cannot pay back their
debts as the economy stagnates.
As I said in my book, The Long Depression, (Chapter 9) in some ways, Italy is in the most dire position of the top seven capitalist economies.
Italian capital was in the doldrums before the Great Recession.
Profitability has been falling since 2000 and is now down 30% since
2004. Net investment has dried up and productivity of labour is not
just growing slowly, as it is in other major economies, it is
contracting outright. Italy cannot recover because the Long Depression
in Europe continues.
And as a result, its banks are close to bankruptcy. Banking analysts
reckon that up to eight banks, led by Italy’s third largest and oldest,
the infamous Monte Pachi, risk failing if Renzi loses the referendum.
That’s because potential investors in these banks, badly needed to
recapitalise them if they write off these huge bad debts, won’t cough
I made some simple estimates of the likely losses that the Italian banks face (based on the Bank of Italy’s recent financial review).
The banks have lent up to now €2trn to Italians businesses and
households. About €330bn of these loans are ‘bad’ (i.e. won’t be paid
back). That’s about 20% of Italy’s GDP. The banks have built up
reserves to cover these potential losses of about €150bn and they could
expect to sell off some of assets of bust businesses over time. Even
so, there would still be a potential loss of about €100bn on the banks’
books if they grasped the nettle and ‘wrote off’ these bad loans. That
would completely wipe out the value of the shares of the investors in
many of these banks. For example, the hit to Monte Paschi would be nine
times more than the bank is worth on the stock market right now. And
Italy’s largest, Unicredit, which is supposed to helping the other
smaller bust banks like Banco Veneto, would also be wiped out. Indeed,
Unicredit wants to raise €13bn for itself to shore it up.
I reckon that a bailout of the banks would cost at least €40bn, just
to put the larger banks back on their feet. Where is such a bailout to
come from? The Renzi government set up a special fund called Atlante,
which was funded by the other larger banks, with a little from the state
savings bank. This raised just €4bn, most of which has already been
spent on Monte Paschi to no avail. But that is not the worst of it.
Under the new EU banking bailout rules, insisted on by Germany, state
money cannot be used to bail out the banks. The bank shareholders and
bond holders must take the hit – at least first.
That sounds okay, you might say. Let the bank shareholders pay. But
here is the rub. The Italian banks have been engaged in crude
mis-selling to all their customers with their savings. Customers were
encouraged to ‘save’ by buying the bank’s own bonds – in other words
lending to the bank itself. So hundreds of thousands of older (not so
wealthy) people would now lose all their savings if the banks write off
their bad debts and ‘recapitalise’ by writing down their own borrowings
(bonds to zero). This would be political dynamite, apart from causing
misery to hundreds of thousands – and it has already happened to
‘savers’ with Banco Veneto and Monte Paschi.
Renzi has been pressing the Germans and EU leaders to relax the rules
and allow state funds (ideally European ‘stability’ funds, which are
available) to bail out his banks. But the Germans are stubbornly
holding to the rules, particularly as bailing out the Italians, after
the Greeks, is anathema in Germany and fuel to fire to the Eurosceptics
in the upcoming German election in 2017.
So if the vote goes against Renzi on Sunday, international and
Italian investors are going to be very reluctant to stomp up funds to
Italian banks when they fear the Italian government will fall and
possibly be replaced in an early general election by the populist Five
Star alliance, which has already won mayor’s positions in Rome and Turin
and is leading in the opinion polls. Could there be a ‘populist’
leading Italy out of control of the elite, and this time not
Berlusconi? At best, there will be a government unable to act through
parliament to implement ‘reforms’ in the interest of capital, namely
reducing labour rights; more privatisation and government spending cuts.
It’s possible that Renzi will win the vote against all the
expectations as ‘no’ voters don’t bother to turn out. Even if he does,
the problem of the banks won’t go away. And the problem of the banks is
merely a symptom of the failure of Italian capitalism and the paralysis
of its political elite. Italy remains deep in depression and we have
not even had a new slump yet.
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