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Fears of “Doom-Loop” between Italian Banks and Government Bonds Resurface

wolfstreet.com / by Don Quijones /  

What will Draghi do? 

After two controversial bank rescue operations that stretched Europe’s bank resolution laws beyond recognition, things are beginning to look a little less desperate for Italy’s banking sector. The initial market reaction to the interventions has been overwhelmingly positive. For the first time in years Italian banks are leading Europe’s Stoxx 600 bank Index — upwards, not downwards.

Even the recent announcement of a capital raising and bad-loan sale plan by troubled bank Banca Carige was met with enthusiasm, sending its shares up 30%.

One of the Italian banking sector’s biggest problems — its sky-high bad loan ratio — will soon be under control, claimed Bank of Italy Governor Ignazio Visco in a recent speech to the Italian banking association. The interventions in Monte dei Paschi di Siena and the two Veneto-based banks, Popolare di Vicenza and Veneto Banca, will take almost €50 billion of bad loans off their balance sheets, leaving about €275 billion in the system. Within a year Italy’s non-performing loan ratio will be down to an almost respectable 8% of total loans, Visco said.

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