Italy Is About To Fall

April 2nd, 2017 | S.P.

As the chickens come home to roost in Europe, the failed pieces of a doomed experiment are about to crumble into fragments that will never be reparable. Following Brexit and a rise in what our ever-so trustworthy media calls “right-wing nationalism”, the clouds of doom seem far from dissipating over Europe just yet. The next to go in a string of wobbling dominoes may be Italy—but not of its own volition.

Bad loans totalled almost $400B in Italy last year. Most of Italy's large commercial banks carry a burden now that will be impossible to subdue without extravagant measures. Most of those bad loans originated with Italy's construction and real estate industries, who optimistically over-valued the brightness of the country's prospects. They must now face bankruptcy or extravagant bailouts from the pockets of Europeans. This, of course, should not be expected to settle well in the guts of Germans, Greeks and the French.

As most of Italy's banks face a profitability crisis, the rest of Europe will again be forced to bear the burden of someone else's poor management, bad calculation and greed just to salvage what is left of an economic union that has done no good for them.

It has been suggested that Italy leave the Eurozone until it has sorted out its own failings, but that is not likely to be an option for a country on the verge of collapse. Its people won't likely choose to take their leaky rafts out into an unstable sea alone. They would surely sink. The country's 12% unemployment rate should be a clear indication to the world that things are not alright in a country fraught with devastating economic prospects.

UniCredit approved a rights issue in February to sell shares at discount. As one of Italy's largest lenders, UniCredit began selling discount shares to offset $18B in bad loans this March. This will likely be the beginning of a new trend in Italy's collapsing financial industry. There is no promise, however, that it will act as anything more than a band-aid on a gaping sword slash.

Italy's problems have reflected negatively on Europe's whole price-to-book ratios, but the entire Eurozone would still face its own struggles without Italy.

The European Union will now do everything it feels must be done to prevent an Italian collapse. While the troubled country remains a member, an internal collapse of the country's economy would trigger a domino effect that could rattle global markets. Even an ejection of Italy would shake world markets and jolt US and European economies.

As 2017 unfolds, Italy will be the new Greece. Markets will shake and dollars will plunge into the abyss as they did with the Greek crisis. Prospects look bright in American markets following the election of Donald Trump, but by the end of this year we will all be singing a different tune. Not only because of Italy, but because of our own sunny optimism—which has been misguided at best.  

More reading: