Italy Is the Mother of all Systemic Threats
Italy has been in a crisis for at least 8 months, though mainstream media did not recognize it until July. This crisis has nothing to do with Brexit. Even if Britain had voted to stay in the EU, the Italian crisis would still have been gathering speed.
The high level of non-performing loans has been a problem since before Brexit. There is nothing in the Italian economy that can reduce them. Only a dramatic improvement in the economy would make it possible to repay these loans, and Europe’s economy cannot improve drastically enough to help.
Banks were carrying loans as non-performing that were actually in default and discounting the NPLs rather than writing them off. But that only hid the obvious. As much as 17% of Italy’s loans will not be repaid. This will crush Italian banks’ balance sheets, and this will not only be in Italy.
Italian loans are packaged and resold, and Italian banks take loans from other European banks. These banks have in turn borrowed against Italian debt. Since Italy is the fourth largest economy in Europe, this is the mother of all systemic threats.
The EU must address Italy’s and Germany’s problems, but its regulations make finding solutions difficult. This all was put in motion in 2008, but it is not a 2008 crisis. This is a political and administrative crisis. The European system was created to administer peace and prosperity, not to manage the complex gyrations of an economy.
Sometimes the major international systems fail. The less entangled you are with these systems, the less damage you suffer. And since such systemic failures leads to political conflict and crisis, the case for nationalism increases – assuming you aren’t already trapped in the systemic crisis. Increasing nationalism follows systemic failure like night follows day.
Friedman discusses bail ins, not bail outs; the crisis is spreading; the US piece of the puzzle; and the big picture.