Political and Financial Contagion from the Italian Banking Crisis: Italy’s Exit?

Posted on by

Just because a crisis is “slow moving” does not mean it can be successfully arrested.

The political and financial stakes in the ongoing Italian banking crisis rose today as the chairman of Societe General, Lorenzo Bini Smaghi, talked up the risk of a “pan European banking crisis” if the European officialdom didn’t relent and permit Italy to use government funds to shore up its bank most at risk of keeling over: number three Monte dei Paschi.

The spectacle of Bini Smaghi warning that an Italian banking implosion could kick off a broader European meltdown, while accurate, comes uncomfortably close to the famous scene in Blazing Saddles, where the sheriff threatens to shoot himself to ward off an angry mob.

So why is a major bank leader stoking fears about the health of Continental banks? And why did Italy’s prime minister Matteo Renzi throw mud back, saying that the troubles facing Italian banks were minuscule compared to those those of players with big derivatives books, meaning Deutsche and the big French banks? Mind you, Mr. Market took notice of the spat: European bank stocks fell, including SocGen’s. The fabulously undercapitalized Deustche Bank’s share price dropped to its lowest level since 1989.

By way of background, Italian banks have been in serious trouble for quite a while. Unlike the systemically important players in London, Paris, and Frankfurt, they weren’t exposed in a big way to the tightly coupled credit default swaps business, nor had they loaded up on US subprime exposures. As a result, their crisis-related bailouts were modest: a mere €22.0 billion, versus €114.6 each for the UK and Germany, €174.3 for Spain, €39.8 for the Netherlands, and €23.3 for Belgium.

Italian banks got sick the old-fashioned way: on lending to businesses in their markets. As a direct result of the damage of the crisis to the Italian economy, many loans went bad; more got in trouble as austerity pushed more enterprises into distress. Italian lenders are regularly accused of cronyism and there no doubt were plenty of cases where sick borrowers were given more credit to make them look solvent. But that’s a common practice. Japan’s banks did that en masse in their post bubble years (a move the authorities later said was a big mistake) and in the US, home equity lines of credit were put into negative amortization routinely (not only by not restricting access to the credit line when they were clearly having payment problems, but also encouraging borrowers to make token payments, like $5 a month, and declaring the account to be current).

The problem with the Italian banks thus isn’t the complexity of the problem; it’s the scale, and the fact that Italy sits in the Eurozone, which has a Rube Goldberg bank resolution scheme that the authorities are unwilling to admit won’t work in practice.

Italian banks have an estimated €360 billion of bad loans, which is roughly 20% of GDP. While the value of these loans is not zero, the losses that need to be taken to clean up the Italian banks are enough to focus the mind. Having Italy’s banks remain in a zombified state means they aren’t giving much in the way of credit to businesses that need it. Italy has a high proportion of small to medium-sized businesses. That makes it particularly dependent on bank lending, so the dodgy banks are a drag on the economy.

Normally, the approach for this sort of mess is the one used in the US savings and loan crisis and in Sweden in its early 1990s bank meltdown: spin out the bad loans into a “bad bank,” where they are worked out to recover as much value as possible. The shareholders of the original bank, now a “good bank” are wiped out as it is recapitalized by the government, and top management and the board are replaced. The good bank is eventually sold.

The impediment is the new banking rules that came into effect in January 2016. Thomas Fazi described at length in February why they are such a train wreck. His overview of the fundamental flaws of the bank resolution scheme:

….a very strict and inflexible burden-sharing hierarchy aimed at ensuring that (i) the use of public funds in bank resolution would be avoided under all but the most pressing circumstances, and even then kept to a minimum, through a strict bail-in approach; and that (ii) the primary fiscal responsibility for resolution would remain at the national level, with the mutualised fiscal backstop serving as an absolutely last resort.

The danger of a bail-in is it is a one-size-fits-all approach guaranteed to cause bank runs. A “bail-in” means that rather than using new money to restore bank equity, shareholders are wiped out then junior creditors if needed, and enough of the remaining creditor funds are forcibly turned into shareholders for the bank to have a decent level of equity. As Fazi points out, it’s a potentially useful tool but a terrible idea as a forced solution. For instance, the first time bail-ins were used was in Cyprus. Those banks had little in the way of borrowed money, so it was depositors who took haircuts. In the case of Spanish banks, many depositors had been persuaded to invest in equity-like instruments that they were falsely told were the same as deposits. That puts them near the head of the line for taking losses in the event of recapitalization. In Italy, some banks have apparently resorted to similar chicanery, but not on the scale that took place in Spain. However, many consumers are investors in bank bonds, so they would be hit in the event of a bail-in. And given the Cyprus precedent, a bail-in of any size should scare depositors, and will lead them to move deposits from weak banks to stronger ones, creating liquidity stress and even bank runs.

It’s not as if Italian officials are ignoring this risk; they’ve proposed implementing a good bank/bad bank structure, and sought emergency relief so they can exceed Maastrict deficit limits to assist their banks. They were told in effect that their problem was not an emergency and they need to follow the unworkable bail-in regime. Renzi was rebuffed by Merkel when Italy tried again in the wake of the Brexit vote, arguing that the situation had become more dire. Merkel insisted that Italy needed to follow the new rules.

It’s not just that the Bini Smagi’s-Renzi spat had put more pressure on European banks, leading Bloomberg to point out in an editorial that failing to give Italy slack from “half-baked” rules will prevent it from handling an otherwise manageable banking crisis. It is also that the Italian banking crisis has the potential to break up the Eurozone.

It’s bizarre to see European officials taking a hard line with the UK, motivated by the perceived need to beat back threats like Marine Le Pen and Belgian and Spanish separatists, yet ignore the fact that Italy is as big a risk to the EU. That should imply they need to weigh political considerations along with the economic ones. But that isn’t happening.

While Marine Le Pen has long said she would have France leave the Eurozone if she were to become Prime Minister, the odds of her winning are low. As I understand it, the final round of French elections are a two-party matchup. So even if her Front National made it to the last stage, the mainstream parties that were on the sidelines would almost certainly urge their voters to support her opponent.

By contrast, as Ambrose Evans-Pritchard has long pointed out, from an economic standpoint, Italy is the country that would both benefit most from departing the Eurozone and has the heft to best go it alone. And the internal politics also make the odds of a fracture look higher than in France. From the Financial Times:

The populist Five Star Movement has emerged as Italy’s leading political party, overtaking Matteo Renzi’s ruling Democratic party (PD) in four separate opinion polls that have exposed the growing vulnerability of the country’s centre-left prime minister.

The primacy of the Five Star Movement, which is led by the sardonic comedian Beppe Grillo and has called for a referendum on ditching the euro, reflects a shift in public opinion against Mr Renzi that will heighten fears of a return to political instability and uncertainty in the single currency’s third largest economy….

It will also raise alarm bells about the fate of an autumn referendum on constitutional reform on which Mr Renzi has staked his political career. He has threatened to resign should it be defeated…

According to polls released on Wednesday by Ipsos, the Five Star Movement is supported by 30.6 per cent of Italians, compared with 29.8 per cent for the PD…

The polls look even darker for Mr Renzi if the likelihood of a run-off between the two largest parties — which is called for under Italy’s new electoral law if no party exceeds 40 per cent — is taken into account. In those scenarios, the Five Star Movement would defeat the PD by as much as ten percentage points, as right-wing voters would coalesce around the protest party.

Renzi has already taken a hit thanks to his interior minister having been caught out having a brother recently hired by the postal system. But this pales compared to the damage he would take if bank bail-ins were to start.

Merkel has played king-maker in Italy before. The Economist credits her with helping dispatch Berlusconi. But the famed Teutonic insistence on following the rules, which Merkel’s peers believe are the best chance to preserve the EU, is self-destructive when those “rules” are guaranteed to precipitate a financial crisis. Everyone knows Germany would have to relent in the case of Deustche Bank, which as Renzi points out, is likely to list if bank bail-ins commence. But that is tantamount to a full bore financial crisis. The Eurocrats need to stop obsessing about perfidious Albion and recognize that just as imminent a crisis is sitting on their doorstep.

Print Friendly, PDF & Email


  1. Jeff

    Just a quibble on the French elections. There are three rounds in the elections. The first one is ‘primaries’ both left and right, and both are manipulated to make sure N. Sarkozy and F. Hollande come out on top. Hollande won in 2012 because people were fed up with Sarkozy. Next year will see a similar anti-Hollande reaction, but people are not happy to welcome Sarkozy back. I’d compare her chances with Trump’s.

    1. Yves Smith Post author

      The post does say “final round” so it is correct as written. The commentaries I have seen treat Le Pen as having a good shot at getting into the final round but no realistic odds of winning it, so their take is different than yours. I realize there are earlier rounds, but I was not clear on the elimination process.

      1. john c. halasz

        But Le Pen is running for President, not Prime Minister, as your post states. It’s likely she’ll end up in a run-off against Sarkozy, and it’s just conceivable that she might edge him out, if a left-right anti-EU strategic voting alliance forms against Sarkozy, (who would move right, if elected, in order to steal Le Pen’s voters anyway). But a narrow win for Le Pen wouldn’t mean that the FN would win the legislative elections proportionately, so likely a coalition of other parties would form the government and she would be forced into “cohabiitation”.

    2. Mathias Mond

      Agreed, except that Le Pen’s chances of winning right now look a lot higher than Trump’s were at the equivalent stage of the US elections.

      Le Pen making it to the final runoff seems pretty much guaranteed, the only question is against whom – Hollande or Sarkozy (if he doesn’t blow up before which is still very possible) ? And I would be very surprised actually if one of the two then gave more than a very weak endorsement of the other just to fend off Le Pen.

      But it is still early days, a lot can happen between now and next spring.

      1. PlutoniumKun

        Yes, thats a key problem – normally you would expect the mainstream parties to gang up to prevent Le Pen from winning, but in different ways Hollande and Sarkozy are such terrible candidates that voters may see Le Pen as a reasonable alternative. While her party may be dangerous and repulsive, she is a very impressive politician.

  2. Jeff

    Hi Yves,
    You, Clive and others pointed out clearly that Greece could not leave the Eurozone – they would be ‘without money’ for the next several years.
    Italy seems to be in the same binds.
    Can we imagine a scenario where each country goes its own way, but that they keep sharing the Euro, like they used the EMU before the formal introduction of currency?
    Can we have imagine each country having its own monetary and fiscal policies, but all using euros for payment purposes?

    1. vlade

      It may be possible for a small subset of states, economically closely linked to German (Netherlands, Austria) – but in reality very unlikely. If Italy goes out, getting rid of EUR would be a pretty quick decision.

    2. Yves Smith Post author

      Thanks for asking. I didn’t say they could not leave. I said it would be such a total train wreck from an IT perspective to introduce a new currency that they effectively could not leave. That may seem like a distinction without a difference. :-)

      Same issues here. Didn’t want to belabor that, but I’d also need to look at importance of tourism and vulnerability to critical imports. I doubt Italy is much closer to being an autarky than Greece, but I need to see what sectors are exposed and how big they are before I can give a firm reading on how crippling the bank IT issues would be.

      1. Oregoncharles

        Yes, this was all covered under “Grexit,” but there are two big differences:

        Italy is a Big Dog – as the article says, 3rd biggest economy in the bloc. So while the EU could just watch Greece drown (and this attitude is just what led to Brexit, in my opinion), Italy would drag them all down with it. Again, reference Deutsche Bank; has it no entanglements with Italy.

        And second: How does “IT trainwreck” play politically? I suspect a lot of people would be deeply unimpressed. Italy has been described as the world’s largest functioning anarchy; Italians might be especially unimpressed. Hell, I have a sneaking suspicion, admittedly born of pure ignorance, that clever people would find ways around the IT tangle (I certainly hope so, since in various ways it faces all of us). If things are bad enough, pure wishful thinking may rule the day.

        Which takes us back to Point 1. The tail wags the dog, as Greece could not (much the same applies to Spain, the 4th(?) largest). So the question may be: are the Germans neurotic to the point of self-destructive? Remember, a deeper theme here is that the EU has turned into the 5th Reich, precisely the opposite of the intended effect. Resentments are being built up, bad memories triggered. Again, that’s one reason for the Brexit vote.

        So: is someone out there working on a solution to the IT barrier? Because that would be a 10-bagger if there ever was one.

        1. Yves Smith Post author

          You are missing, as IT experts documented at great length, that the payment system depends completely on code, and the coding for currencies is heavily on mainframes in Cobol or even more kludgey languages. They have no modern tools like text editors. The process of changing the code to allow for the handling of dual currencies is manual. That means human beings need to inspect billions of lines of code and make manual additions. They also need to be tested because payments software is mission critical. Errors can mean the loss of million, even billions, of dollars. That is why it took eight years of planning and three years of execution for the euro to be introduced without a hitch. And there is a TON more code and complexity than in the early 2000 the conversion was made.

          The fact that Italy is big has nothing to do with the magnitude of the task. Your demand is tantamount to saying a billionaire can get his wife to deliver a baby after three weeks of being impregnated because he is very important and therefore he can make things happen faster than normal people.

          1. I Have Strange Dreams

            Sounds like the Y2K scam. We can put people on the moon, but can’t change a few symbols on a computer? Give me a break.

            1. Gary

              Y2K was not a scam. It was a serious problem. There were plenty of scammers and fear mongers working it, but for someone in IT, like me, it was far more challenging than changing a “few symbols” on a computer.

              1. I Have Strange Dreams

                Thanks for stopping all those planes raining from the skies, nuclear armageddon and murderous toasters.

          2. Oregoncharles

            Yes, i remember all that. Scary as hell, because it effectively applies to a lot more than currency and it means the banking system is even more fragile than it appears.

            I failed to draw out the points I was trying to make:

            1)Italy’s size means that its collapse would threaten the whole system, so the EU can’t just write it off. Barring self-destructiveness, the EU would have to help Italy exit, or pay the consequences. And what would a huge bank run in Italy do to the rest of Europe? Italy has leverage; this is a point I first saw here on NC.

            2) Politics: if even I have trouble accepting that it’s that bad a barrier, how will millions of anarchic Italians react? This could be bad.

            Isn’t Italy a favorite vacation spot for millions of Germans?

            Evidently any quick solution would have to dodge the existing payment system altogether. Very risky, at best, obviously. I’m not saying it’s possible, just that it would be very valuable.

    3. Clive

      Yves covers this above but to add, I think too that main difference between Greece and Italy is that of timing. The Troika — intentionally — put Greece under siege and (I’m almost being literal here) tried to starve them out. Cutting off access to emergency liquidity funding (the ECB did this) forced a bank holiday which would not — could not — end until Greece capitulated.

      Conversely, with Italy, if a political decision is reached that the euro is toast, then it becomes a case of a managed transition back to national currencies. There’s nothing to stop (and every reason not to stop) the ECB continuing to provide euro liquidity until the appointed date when (in this case) Italy resumes the lira as a national currency. There’d be a period where a “shadow” lira floated as a virtual currency against the euro (it would in a variation of what you suggest be used in some transactions) in a kind-of reverse of the situation whereby the ERM currencies shadowed the euro prior to the euro taking over as the single currency.

      But any attempt at a “hard stop” for Italy to get out of the euro is subject to the same constraints as we identified for Greece — logistical (e.g. getting the notes and coins ready, distributing them to cash management centres), technical (e.g. IT, EPoS terminals), international standards definitions (e.g. ISO approval for the new currency code), physical (e.g. ATMs, bulk note counters, vending machines) and similar. I’d say these were just as onerous for Italy as they were for Greece.

      Note that I’m not saying this (Italy abandoning the euro and a subsequent euro break-up) is likely; the piece explains why though it is a possibility due to inept political decisioning leading to abysmally flawed policies which are almost designed to produce just such an existential crisis for the euro. But should this happen, there would be far more time available than Greece was given. Whether it would be enough time, however, that’s a different matter…

      1. Peter Pan

        I realize this may sound far fetched, but would it be possible for Italy to enlist the assistance of Russia & China to expedite the technical and physical issues regarding a switch back to the Lira?

        1. Clive

          Alas no-one has any special magic wand to wave. In terms of the physical adjustments (such as to accommodate the notes-and-coins currency issuance that will have a different specification from the euros — ATMs, vending machines, bulk cash handling equipment etc.) assistance from a different geographical location not only brings nothing to the party, it is actually a negative because whatever resources you need have to be transported. And for the technical, Russia has very strong skills in certain niche IT areas (especially cryptography and security) but is a long way adrift in commercial applications.

          China has been trying to muscle in on the IT body shop market, but bums on seats isn’t what is needed to resolve the issues in bank IT. The nub of a lot of the problems in bank IT (and this is what any abandoning of the euro in any country would be faced with) is that it has ended up becoming a horrid chimera of vanilla out-of-the-box boilerplate (J2EE, Oracle, DB2 and so on) plus some in-house legacy stuff, plus some applications which started out as being shrink-wrapped solutions but got customised so they are no longer exactly what the vendor’s mainline is as they’ve deviated from it in a material way plus even if it’s a standard piece of software it’s about the most convoluted implementation of it that it’s possible to get so that you need subject matter expertise from the organisation which is running it to know what’s really going on with it.

          As an example of the latter, Active Directory is a good “for instance”. My TBTF implements AD using precisely what MS ships. But it’s still a wretched monster to wrestle with if you have to make significant changes across the entire forest because the OUs are mind-bogglingly baroque. Only about 10 people really have sufficient skills and the intellectual ability to conceptualise how it is set up (a pre-requisite for being able to change it successfully) and you can’t simply replicate that knowledge and the kind of personality which can use it at will.

          Assuming Italian banks are similar, and I can’t think why they’d be different, just this alone would throw a huge spanner in the works of any attempt to de-euroise (if that’s a word) by, say, splitting a bank into two “old euro legacy bank” and “new lira bank” arms.

          Oh, and if that’s not bad enough, you’ve got hopeless basket cases like Deutsche Bank Group who admit their own IT is deeply dysfunctional just trying to do Business As Usual operations, let alone major upheavals. While Deutsche is the best-known example of this, you’d have to be a hopeless optimist to figure that some of the cash-starved Italian banks weren’t just as awful, merely better at concealing it.

          Unfortunately the only way to crack the problem would be to grind it out into very fine powder. Quick wins, hack jobs and short cuts usually turn out to create more problems than they solve (which, nicely circularly, is how Deutsche got into its current predicament).

          1. Oregoncharles

            God, you’re scary, Clive. This isn’t just about Italy or Greece or the euro; it’s about whether the ATM works tomorrow.

            Apparently the ATM working is a minor miracle, dependent on about 10 people not getting on the same plane.

            Although this does remind me that we used to get by without ATMs. Or computers, for that matter.

            1. Yves Smith Post author

              You are out of line in being dismissive. Among other things, tourism has become dependent on access to ATMs. Most travellers do not want to carry lots of cash or travellers checks. Look what happened to tourist bookings in Greece when the ECB effectively imposed a bank holiday and ATM withdrawals were restricted to small amounts a day (IRC 60 euros). Tourists who weren’t committed avoided Greece. There are always other places to go. Croatia is actually cheaper than Greece and offers a lot of similar experiences. The Turkish coast is supposed to be spectacular. Provence and the French Riviera are an alternative to Italy. Etc. Portugal is cheap and very nice, much more to do and see than you’d think. I’d take Barcelona over Rome as a holiday destination all day. Etc. And that’s before you get to the impact on domestic commerce, which was also devastating in Greece.

              Like it or not, payment systems are essential for commerce. And businesses could not function now without computers. I worked in finance before the age of the PC. I had to do analysis by looking up information manually in printed copies of annual reports, which we would have to get from our in-house library (Goldman maintained an extensive library and its staff would retrieve and deliver the documents quickly), copying it into green accounting ledger paper. I would then have to do all computations by hand. The resulting document would need to be typed by a secretary, reviewed by me for errors, then reviewed again by a more senior person before it was presented to the client (said more senior person would spot check the computations extensively). And for financial forecasts, if anyone found a single error that meant everything to the right in the spreadsheet was wrong and had to be redone.

              And you similarly apparently don’t remember life before word processing or e-mail very well, or at least have not seen its impact in commercial settings like drafting contracts.

              As the people in Maine like to say, you can’t get there from here. Things like corporate logistics, cash management, transaction clearing, and supply chain management have become dependent on computer based records and e-mails. That’s just for starters. I’m sure Clive and others can elaborate. I’ve long said if China wanted to bring the US to its knees, all it would need to do was stop shipping chips and products with chips in them and interfere with shipping from Taiwan (although some could still be air-freighted but not enough to fill our massive needs). In 24 months, as various products stared crappnig out, the economy would start failing. And that includes food not getting to stores. Look at the telematics in newer cars and tractors. The problems even would extend to logistics.

              1. Rivet

                I put the shotgun in an Adidas bag and padded it out with four pairs of tennis socks, not my style at all, but that was what I was aiming for: If they think you’re crude, go technical; if they
                think you’re technical, go crude. I’m a very technical boy. So I decided to get as crude as possible. These days,I thought, you have to be pretty technical before you can even aspire to crudeness. I’d had to turn both those twelve-gauge shells from brass stock, on the lathe, and
                then load then myself; I’d had to dig up an old microfiche with instructions for hand- loading cartridges; I’d had to build a lever-action press to seat the primers -all very tricky. But I knew they’d work.

                — William Gibson, Johnny Mnemonic

                Seemed apropos to the banking IT problem. It really highlights how layered and tightly wound society is. One would think going backwards would be easy, but it is probably even more difficult then moving forward, at least if you want some semblance of control in downgrading.

              2. Oregoncharles

                I’m not being dismissive. I think the subject is truly scary. It points to a deep fragility in our society.

              3. fajensen

                I’ve long said if China wanted to bring the US to its knees, all it would need to do was stop shipping chips ….

                How about shipping millions of those chips (Intel Platform Controller Hub or CPU’s) equipped with a built-in computer that sits below the operating system so that all the hardware and the device itself(!) can be “managed” remotely?

                Brand it with something like “trusted” or “secure” for evil irony (’cause every techie KNOWS that whenever adjectives are used in a product / technology name, their meaning is inverted ;-).

                *Very* smart person, “Dmytro Oleksiuk” goes poking around:


                Maybe we have yet another blow-back from “Team America’s Global War on Terror”: Intel’s Management Engine – “rooted”!?

                Or maybe it is really the Israeli’s – modern Intel CPU’s, from Itanium and up, are designed in Haifa, Israel.

                Basically, every recent piece of PC hardware is “back door’ed” per design. The Internet will find the holes and write exploits for them. Even if all the TLA’s can show some restraint, the internet marketing crowd probably cannot.

                1. Yves Smith Post author

                  *Sigh*. This is not a matter of chip design. It is where the hugely capital-intensive “fabs” are located, and it is overwhelmingly not here.

                  Your comment does no even begin to address the realities of where chips are actually made and why. Low-end chip manufacture (which is still a large proportion of the industry in volume, less in revenue terms) had gone overwhelmingly to Asia by the late 1990s. China and Taiwan have been moving aggressively into higher-value added chips since then with great success.

                  1. John

                    Can you post some links for further reading?

                    I remember talking to a former political consultant and he said there was a huge shift because of some change in the chip market in recent years, and that in the past, the Chinese could have brought the US back into the stone age if it wanted to (because it manufactured the chips, it would have been able to disrupt them somehow if it wanted to, or something like that), but that now things have changed. I don’t know how credible of a source he was though because his other big theory was that increased immigration from the Middle East to Europe and the high birth rate of these Muslim immigrants was going to lead to entire regions adopting Sharia law and then a massive right-wing backlash, something I don’t buy (all the demographics studies I’ve seen say the Muslim population in Europe over the course of the next few decades won’t exceed more than 5-10%, surely nowhere near enough for those kind of changes).

                    Anyway, when I type in China and chip manufacturing on google, I did find an interesting article on Cfius blocking the purchase of a controlling stake in Philips by a Chinese VC firm, but nothing really else on the subject. I know it’s something I should know more about so I’d appreciate any links you could post.

                    1. Lambert Strether

                      Thanks for the information, but you may not know that we don’t take “assignments” as a matter of site policy. How about we start by you posting the link that you found, and then the NC commentariat can chime in?

                  2. John

                    I replied to this but it didn’t pass moderation for some reason. Could you post some links on this subject? I’d like to learn more.

                    1. Clive

                      http://trade.gov/topmarkets/pdf/Semiconductors_Semiconductors.pdf is a good market overview. Note the complete dominance of the foundries part of the business which Yves cites above in the far east. IDMs like Intel are at the top of the value chain but volumes are small by comparison. The “grunt” work (huge productions of high volume, low margin silicon) in world output by volume depends on these painfully capital intensive foundries which, once set up, get tied into a specific geographic location. As Yves mentions, the far east dominates foundries with Taiwan — not China and hardly anything at all in the US — having a 74% share of this mass production (foundries) end of the market.

                      China is upping the ante in IDMs and fabless, with Taiwan a huge presence in areas other than IDM.

            2. Lambert Strether

              Quasi-official Green representative emits commit that shows he not only paid no attention to Naked Capitalism’s extensive coverage of Grexit, but is utterly unqualified to comment on matters financial or geo-political.

              Film at 11.

              And Greens wonder why so many voters don’t take them seriously….

            3. Clive

              Sadly wishing a bad situation wasn’t real doesn’t make it go away. If it were possible for the banks (and the other institutions which make up the domestic payments system, interbank clearing, forex settlement, the card schemes and many other similar key entities) to easily roll back their implementation of the euro and within a few weeks or a month at the outside return to national currencies, it would give the Eurozone members a lot better options. But Greece realised it couldn’t do it. Neither can Italy.

              In some ways it is easy to blame the actors I’ve just listed above, but the more uncomfortable reality is that, as societies, we’ve allowed ourselves to be at the mercy of heavily interconnected (which is risky enough) but also fragile (which doubles down on the risk) systems. We like the convenience, the reduced latency in money transmission and the apparently lower costs but we don’t, collectively, want to face the monster we’ve made. Similarly, politicians and regulators don’t want to make the difficult decisions to improve robustness in the systems we’re now highly dependent on.

              When you say

              we used to get by without ATMs. Or computers, for that matter.

              You make a true statement but infer an untrue conclusion. You imply, correct me if I’ve misunderstood, that we can in short order return to a cash-based economy.

              We cannot do that. This is because much of the legacy the cash-handling infrastructure has been decommissioned. There are very few regional cash management centres, the fleet of available armoured trucks is less than a third what it was in 1980, cash registers have a tiny spaces for notes and coins (check next time you’re in a store), very few retailers have a safe of any significant capacity on the premises, the profit-and-loss accounts for a retailer relies on minute cash floats (for example, a UK major coffee shop chain demands a float of no more than £100 in each store, they are not unique in that) and large denomination notes are extremely difficult to get hold of in any quantity (again as an example, most UK bank branches only have between £2,500 and £10,000 in £50 notes, the highest available, depending on branch size — and you have to go to a city branch to find the larger figure). Reverting to a cash-only model like the one you’re suggesting would face constraints which would take years to remedy.

              And yes, again, sorry, but it is a fact, there are hugely complex systems which we don’t (usually) even know exist when they work (but we’d sure be all-too-aware of them if they failed) which are only understood in depth by a handful of people. One TBTF managed to (very recently) kill between 10 and 20% of it’s entire desktop PC estate by rolling out a group policy object which had unexpected and unintended consequences on the security settings of the PCs. It took days to figure out what had gone wrong, why and how to fix it. It got away lightly because only PCs within a very specific condition were affected. That was just luck, it could have been the whole lot that were rendered inop. Had that happened, the TBTF would have been unable to action wire transfers, amongst other important things, for days on end. These sorts of near misses happen all the time and it is just a question of waiting until one of them causes a major outage with a knock-on effect to wider society.

              If anyone is being scary, it’s you because glibly thinking (and stating publically) that none of this matters actually encourages those in positions to do something about it to think — correctly in your case — people don’t care so why should they take it seriously or get the TBTFs to mend their ways.

              1. Eustache de Saint Pierre

                It does appear that Mary Shelley was correct in terms of the monster we were creating.

      2. washunate

        Clive, I’m curious why you think Italy has/had notably more time than Greece? Greece had a multi-year slow motion bank run before things came to a head. The political class chose to keep going; there was no out of the blue, exogenous shock. At some point, we are talking about such long timelines that notions about ‘enough’ time become rather abstract and irrelevant, don’t they? It’s like people who say the US can’t withdraw troops immediately from [insert country here]. Of course it can’t be done immediately, but that’s being rather obtuse. If we had started in the past, it would be done by now.

        To date, there has been no political will amongst currently participating EMU countries to leave. I would posit that political will is far more important than logistical, technical, and physical obstacles. I think this is where we’ve gotten a little muddled in the conversation, both narrowly at NC and more broadly across what constitutes modestly liberal/reality-based discourse.

        The issue of those obstacles is real but easily solvable with a modest amount of time (assuming the US is not more actively blocking everything behind the scenes, but if that’s the case, then bringing that out into the open would itself amount to a depressing form of progress). What is far trickier is the insolvency of the major banks since changing currencies doesn’t impact that at all. Somebody has to eat the losses. That’s a political issue, not a technical one.

        Something I have seen quite frequently in discussions of MMT, national currencies, and so forth over the past couple years is conflating those two distinct issues. The euro as a currency unit doesn’t cause bank insolvency, and reinstating national currency units doesn’t solve bank insolvency.

        1. Clive

          As the situation is today, Italy has the luxury of time. Not infinite, but not like Greece where the Troika was holding gun to its head. So long as the ECB is willing to extend euro liquidity to the Italian banks, there is a potential muddle-through period which could be used to implement a different strategy for dealing with insolvent banks. As you say, Greece did have a slow motion bank run that went on and on and you could argue that was actually a breathing space for Greece which their government completely squandered. Italy is sort-of like Greece before the bank run really got going in earnest.

          But as Yves says (I hope I’ve got this right), markets move a lot faster than politics. While the euro per se neither helps nor hinders inherent bank solvency (or insolvency), completely dumbass rules in the Eurozone about who can have what euros in what circumstances has the potential to make a bank insolvency problem into a EU-wide crisis.

          1. washunate

            I appreciate your thoughts. I think I’m a little less generous to political leaders in both Greece and Italy, but I do agree that in a pinch, ‘markets’, such as they are, can move faster. It’s just that to me, that is not an unpredictable phenomenon, so at a bigger picture level, not addressing things before it’s a crisis is the fault of the political leadership.

            It’s a bit like waiting to brake until the instant before you hit the car in front of you. Yes, you can make the technical argument that your brakes failed to stop in time. But the larger point is that you didn’t brake soon enough, and as the driver of the vehicle, it is your responsibility to allow sufficient braking time, or if you can’t do that, to turn over the keys to someone who can.

        2. Foppe

          I would expect part of the reason to be that Italy’s banking system is too big and interconnected for it to be possible to even threaten starving them. (Iirc the figures from 5 years ago, we are talking about €1.5 Trillion of mutual exposure, without counting CDS, etc. That’s quite a lot of contracts to keep track of.) Also, the country/economy is a bit bigger (they’re part of the g8, after all).

  3. Larry

    It is maddening how obsessed with rules the EU Eurocrats, and ultimately German leadership seems to be. At what point do Germany’s obsession with rules come back to bite it? Would a dramatic drop in exports get them to change their tune at all or does nothing change until a country like Italy ships off?

    1. ThePaper

      Germany doesn’t care about EU rules. At least no more than any other strong enough EU nation. They broke the rules in the late 90s and early 00s without much internal or external considerations. What they care now is about their subject nations obeying the rules they imposed on them. And to try to present to the German electorate their subject EU nations as the fault for all EU problems.

      1. Peter Principle

        It’s a variation on the Leona Helmsley philosophy: “Rules are for the little people.”

    2. visitor

      The EU has a so-called “Macroeconomic Imbalance Procedure” that purports to keep countries in the “right” economic track.

      Amongst a dozen of parameters (including the 60% debt, 3% fiscal deficit, etc), there is the current account balance relative to GDP. A deficit larger than 4% triggers an action by the EU Commission to force the country to reduce its trade and service deficit.

      So does, supposedly, a surplus of more than 6% (note the asymmetry).

      Germany has been exceeding the 6% limit since 2008, except in 2010 and 2011 — with a surplus as high as 8.4% in 2015.

      No procedure for excessive imbalance was ever launched against Germany on these grounds.

      Rules do not apply to the powerful players.

    3. Betina

      I’m half-German, so I understand the culture yet have a chip on my shoulder about it – people like to call Germans very rational and wholesome, but that’s not true. For example, the focus on following the rules: Germans will stress the importance of doing that, but it is taboo to question the nature of those rules. So, follow the rules, even if they are stupid.

      Of course, that’s not really how it works in reality, if you look at the VW and Siemens scandals, how many times Germany itself has violated euro rules, or even the dynamics of the Eurogroup, which has no legal basis.

  4. ThePaper

    How unexpected that draconian Brexit menaces are followed, in days, by the realization that the Euro and the European Union is a glass house with its inhabitants throwing stones all around.

    UK is fucked. Well, yes, everyone is fucked. So the options are working towards a reasonable agreement (for short/medium term survival) or short term mutual assured destruction. Of course the current EU power structure is on a middle/long term path to self-destruction so it may just be another delay to what increasingly seems the most likely outcome.

  5. Bimbo

    If the Brexit costs a lot imagine if Italy leaves the Eurozone.

    Of course the Italian situation is hard and it will be followed by some kind of bank cataclysm. What the bankers are missing is the real point here: who will bear the costs of the reduced financial activities that is the goal of the European authorities?

    This time the bankers do not have the support of the Governments as before and they do not have the influence that are used to, to blackmail the Governments. The new rules are so hard and potential catastrophic that no country in the Eurozone can leave the system without suffering an huge economic collapse.

    It is like to chose between the hell and the purgatory. The Italian Government can scream against the purgatory but the other option is exiting to the hell.

    The new rules in the Eurozone are so hard to fit and could be so ugly that it seems deliberated to cut the financial system inside the area. It seems the true goal is: clean the banks and the survivors can catch the activities that will leave the UK/City.

    Nobody in the EU told to the people and elites what is the real goal with these new rules. But they want to cut the financial power of the banks and clean the financial system. Could be true? Not true?

    Italy can not blackmail the EU no matter how big is. And can not blackmail Germany too because even the German have their rotten banks. Germany wants to cut the link between tax payers and the financial oligarchs. It means risking the collapse of some big German banks. And if the German political power do not have afraid to risk the collapse of the German banks why they will be afraid of the Italian banks collapse?

    And if only the Italian banks are risking the total collapse…


    1. ThePaper

      You seem to assume that Germany is ruled by a different set or type of oligarchs than the rest of the European nations. It isn’t. Same boat, same passenger classes, watch that nice iceberg drifting toward the boat.

      1. Bimbo

        You seem to assume that Germany is ruled by a different set or type of oligarchs than the rest of the European nations. It isn’t.

        isn’t it? I do not know and I avoid, as much as I can, stereotypes.

        I look to the facts and later I try to understand the theoretical reasons why some facts exist and some kind of behavior. Not the other way around. If I did as you do, I could use one strange word to describe the stereotype: Schadenfreude. In economic terms I could use the buzzwords: schumpeterian creative destruction.

        I look into the facts and I try to understand why they are behaving like that and why they imposed the new rules. I remember what happened in Greece, Cyprus and even in Portugal. In Cyprus the financial system was cut and clean with a lot of pain to the bankers. Even the Bank of England introduced those rules inspired in the Eurozone set of rules because they succeeded. It was hard but it worked.

        I look into the facts are the way as I understand the goal is creating fences around the economic system, countries and between banks and tax payers. I imagine that are deliberated actions otherwise I would say, the behavior is random. And it is not. Plenty of facts inside the Eurozone show that they are cutting hard the links between the tax payers and the bankers. Between political dependents of the vote of the masses and the bankers who are blackmailing the weak politicians. is it random and unintended consequences? I do not think so.

        If I could use words from the markets, they seem to think à la trader: the first loss is always the smallest and less painful one.

        With those facts I could give you theoretical reasons, economic reasons, why they are doing all this. One is simple: demographics. The other? “Peak of the Debt” à la Fisher. The other? Unsustainable economies with so large share of financial activities in profits, labor and political power.

        But the facts are those: Germany is risking the collapse of their banks and if they do it, it is because some powerful reason that influences the political elites and the Government in Germany. Or I could use the stereotype, again, Schadenfreude.

        Pick your side of the fence as you wish but you will not change the facts.


      2. Betina

        It sort of isn’t. I’d say one of the fundamental issues of the EU is the tension between the elites that benefit from the nation-states and the newer elites trying to establish themselves at the EU level. Not that you’re 100% wrong – I’d say those oligarchs you mention exploit that division.

        1. Bimbo

          Can you point them?

          Not that you’re 100% wrong – I’d say those oligarchs you mention exploit that division.

          Whose oligarchs are you pointing? Because the only oligarchs very scared with the current conditions are the bankers who are screaming. And they scare the politicians about the systemic risks and beg to save them. Just look in Italy. They want to use tax money to save theirs banks.

          Probably “too big too fail” propaganda is not working in Europe any more. And I stress this point. Are the political forces in the left side that want to save banks and use the tax money for that. Why they do that? Two reasons. One is appeasing the bankers and the other is hoping that later these bankers open the credit gates to propel the real estate market. And it is the weak real estate market that is the main cause of the bad debt. Specially in Italy.

          So the financial oligarchs have a powerful tool to “buy” the politicians. In the Continent are the left side and in the UK the Conservatives. In the UK the banks were saved and the result? One astonishing real estate bubble that rises the nominal GDP but it is fake. Some politicians in the Continent want the money from banks to spread the credit and propel the real estate. Italy, Spain, Portugal and so on. And imitate the bad example of the UK.

          The other oligarchs do not complain about the current financial conditions. Only the financial oligarchs and theirs minions.


    2. reslez

      Germany wants to cut the link between tax payers and the financial oligarchs.

      These links are entirely optional and could be removed/disregarded at will. The currency is fiat, there is no natural/physical law that states bank bailouts must necessarily be funded by taxes. The ECB could do what the US CB did during the financial crisis and simply “keystroke into existence” the necessary funds. ($16 trillion IIRC.) That they do not is a political decision.

      That gets into your use of “Schadenfreude”. I think the word “sado-masochism” is far closer to the target (as English language words go). The desire to experience/inflict suffering and pain. Specifically, the suffering of debtors and average citizens for the benefit of creditors and the wealthy. They create the rules, they inflict them, then act helpless when the result is ruin and despair.

      Nothing about this is incontrovertible. Money isn’t gravity, it isn’t climate. It’s a human construct subject to political decisions. In a democracy, the people are supposed to have input on those decisions. Of course that is rarely the case — what we have is PR masquerading as governance, and voting as a figleaf for autocratic self-serving greed.

      1. Bimbo

        In a democracy, the people are supposed to have input on those decisions

        Yes, it is true. But the Germany past is the bad example, isn’t it? Printing the money to appease the masses and win elections. Remember Hitler?

        Putting aside the fact that Nazism was amoral and one dehumanised ideology, you can read some headlines of the time. “Economic miracle” and even Hitler had the support of important British politicians. How? Creating money to pay the new jobs, public works, paid vacations of the workers and so on.

        Of course money is fiat. It have been for centuries but the great conquest of our times was denying the politicians the power to create money and debase it. And if you think that Philip of Spain was too long ago just lo into Venezuela today. Venezuela one country with plenty of natural resources specially the oil and gas is broken, the people is starving and they do not lack money. But lack food, water, toilet paper and even electricity. They can print all they can. Doesn’t mean that this money benefit the people and the voters and stimulate the economy for the benefit of the people, the poor and the voters.

        Of course you can criticize me because I am denying the right of the people to control the money printing machine and it could be anti-democratic. But look, even Hitler was elected by the German people and they supported him for years as long the insulated economic activity gave them bread and butter. So Democracy is not perfect and it is only the best political system because the others are much worse. Doesn’t mean democracy is perfect and elected politicians can have all the will and power at theirs disposal. No. Elected politicians are dangerous and less of them with power, better.


  6. Diego Schiavon

    Option 1: Merkel does not relent. MPS goes bankrupt, the resolution scheme applies. Other Italian banks get bailed in, they go bankrupt, the resolution scheme applies again. Then French banks get bailed in, go bankrupt, the resolution scheme applies again. And the German banks, and so on.

    Chaos ensues.

    Option 2: Merkel does relent. Italy recapitalizes its banks with public money it does not have, but that the Italian at the ECB is printing instead. German voters are rightly disgusted. In 2019, the German government forces a super-hawk as ECB president. A banking and sovereign debt crisis breaks out.

    Chaos ensues.

  7. Alexandre Hanin

    ‘So even if her Front National made it to the last stage, the mainstream parties that were on the sidelines would almost certainly urge their voters to support her opponent.’

    Actually, the Front National made it to the second round a while ago, and Jean-Marie Lepen was indeed crushed by Jacques Chirac (something like 75 vs 25%).

    1. Massinissa

      Yeah but this time the HRE controls *all of Europe*. Its as if the HRE inherited half the Roman Empire.

  8. cnchal

    So why is a major bank leader stoking fears about the health of Continental banks? . . .

    Reason 1: Smaghi is sick and tired of hearing the name Draghi and wants to be famous too.

    Reason 2: Smaghi is secretly trying to tank bank shares, to pick them up on the cheap next week.

  9. Whine Country

    One of the fundamental assumptions underlying push for “globalization” is that nation states that do business with each other are less inclined to go to war with each other. From my viewpoint, that entire line of reasoning is being proven false as world events unfold. How is it any different if one country seeks to destroy another financially through sanctions as opposed to merely refusing to seriously address the issues raised by the legitimate problems faced by your trade partners? I don’t have a solution (easy or hard) but I am convinced that anyone who continues to claim that global trade makes it harder for countries to end up at war with each other is plain FOS! The markets and global financial system have never been more integrated and we are marching rapidly towards war. One thing I am fairly certain of, we need far less economists and financial experts and a lot more historians and sociologists. Like in more facts and way less theories.

    1. jsn

      Last time world trade was this integrated structurally was just before the Arch Duke was shot in Sarajevo

  10. washunate

    As a direct result of the damage of the crisis to the Italian economy, many loans went bad…

    I would quibble a bit with this particular bit of framing. Banks have been and are in trouble all across the western world because we have a system of political economy that has tolerated and even encouraged excessive levels of fraud and malinvestment. To blame this state of affairs on the GFC of 2007-2009 seems to miss the point; the crisis is a consequence of the problem, not its cause. The banks aren’t innocent victims of fraud and malinvestment. They are primary actors driving them.

    The notion that government bailouts or good bank/bad bank structures or similar efforts designed to address small liquidity problems can solve large insolvency problems is essentially wishful thinking. It’s what we’ve been doing for two decades now, give or take, and not only has it not worked, things have been getting worse.

    1. James Levy

      Agreed in general, but they have been getting worse in weird ways and only for certain people, and the big smash-up has been assiduously avoided by the Power Elite.

      From Washington and Berlin things look difficult, even dodgy, but manageable. Rich campaign donors are not calling up the political elite and telling them to change course. Elite university economics faculties and well endowed think tanks are not publishing Op-Eds by the score signally disaster ahead. Central bankers are sure that they can come up with the liquidity necessary if the cracks in the banks’ foundations become too obvious through the pachysandras planted to hide the trouble.

      They pulled it off in 1986, 2000, and 2008. They think they can do it again. We disagree. It will be awful finding out who is right.

      1. washunate

        Ah, I do think they can do it again. That’s what the bank bail-in paradigm is about. (I do confess this makes me less a doomsdayer than some of the NC commentariat. I actually think things can keep working, at a technical level, for some time to come. The proximate cause of change will be the larger sea changes going on in society, not the technical intricacies of the financial system finally leading to trouble too big to hide.)

        This isn’t a feud about whether or not to bail out Italian banks. This is a feud about who pays for it. IMHO, the end result after negotiations are said and done is not going to be utter collapse. Rather, it’s going to be something in between Cyprus Bail Ins and American Bail Outs.

        1. jsn

          Or an entirely different story. The world outside finance can intrude in more ways than we can imagine and the better finance is rigged, the more likely its demise will be exogenous.

      2. reslez

        they have been getting worse in weird ways and only for certain people

        This is the elite attitude, yes. By most measures life has materially worsened for the majority of the population. But certainly the self-proclaimed elites are doing fine and what do they care.

    2. Yves Smith Post author

      Italy was not part of the real estate mania that hit so many other countries. And you ignore that it spent less on crisis-related bank rescues than Belgium, when its economy is over 4 times larger.

      Its banking problems are the result of real economy stress. Yes, some of the loans would have gone bad anyhow, but the problem really is the result of crisis damage to the real economy, compounded by throwing good money after bad.

      And you are out of your depth. A good bank/bank answer is not “addressing small liquidity problems”. It is a bank resolution where the good bank is much smaller than the pre-resolution institution. This is what the US did in the S&L crisis when we had large numbers of bank failures.

      1. washunate

        Yves, I appreciate your insight, maybe I’m not the best messenger on this particular front, and I don’t want to belabor this too much. I really do disagree to a certain extent, though. I don’t understand what real economy stress has to do with big bank difficulties. The real economy has not been driving things, either up or down. And I’m not ignoring less Italian bailout in the past; that’s part of why they need bailouts now. They haven’t gotten theirs yet (directly – indirectly, everyone benefited from the main bailout action in the US).

        I agree I’m out of my depth on the details; one of the challenges of discussing complex things is that we all add a little bit of the puzzle. But I think Ambrose Evans-Pritchard has it backwards, IMO. Italy outside EMU wouldn’t be stronger. It’s still in the same boat, except then the Italian government, standing alone, would have to come up with the purchasing power to make its banks, creditors, depositors, shareholders, and taxpayers whole all by itself. It is inherently impossible to make everyone whole, since it’s not a small liquidity crisis that will solve itself over time, so somebody has to eat the losses. Now Italy could try a different policy than bank bailouts, but they can do that regardless of whether they use the euro or not.

        That’s what I’m poorly trying to get at. I agree with you that an actual good bank/bad bank answer does not address small liquidity problems. My point is that this is how it is being presented by critics of Germany specifically or the bail in mechanism more generally. I find it fundamentally inaccurate and dishonest to act like the problem is specific to Germany or bail ins or EMU rather than a general failure of the idea of bank bailouts in all the myriad ways in which governments have set out to do so.

      2. washunate

        Or perhaps it would be clearer if I offered a different perspective on another front.

        It’s not as if Italian officials are ignoring this risk; they’ve proposed implementing a good bank/bad bank structure, and sought emergency relief so they can exceed Maastrict deficit limits to assist their banks.

        Inflation is one way to fund this, sure, and that requires a Maastricht exemption. But there are several other ways, too, that do not impact Maastricht deficit limits. You can raise a variety of taxes or cut spending in a variety of ways.

        Now you can argue wait, that’s not fair to tax people or cut spending, or wait, that’s austerity to tax people or cut spending.

        But yet, that’s exactly what withdrawing from EMU and devaluing the lira does. It decreases the purchasing power of the depositors whose savings were in euros and are now in liras, or of creditors whose assets were in euros and now are in liras, or of government workers who used to be paid in euros and are now paid in liras, or of government contractors who used to invoice in euros and now invoice in liras, or whomever public policy in this hypothetical Italian sovereignty world decides will eat the losses. It’s no different, in aggregate, than a tax increase or a spending cut. So Maastricht, at a policy level, is not actually a barrier. It’s a convenient political punching bag, not a technical limitation on spending. An EMU nation can spend as many euros as it can raise in domestic taxes + obtain internationally (trade, finance, expat remittances, plundering foreign nations, etc.). That’s the same number of euros that a nation with its own national currency can spend.

  11. That Which Sees

    Germany is a net exporter to all other Euro currency countries. The imbalance can be seen in the TARGET2 balances accumulating every quarter on the ECB books. With out the Deutsche-mark appreciating against periphery currencies to re-balance imports & exports, the economic anomalies will continue to become worse and worse over time resulting in a never ending cycle of EURO denominated financial crisis.

    Worse yet, what are the “rules” about leaving the Euro as home country currency? The Article 50 rules to leave the EU are fatally flawed, but at least they exist. There do not seem to be any rules about exiting the EuroZone while remaining in the EU.

    1. Yves Smith Post author

      Correct! I will have to dig up the language, but the agreements for the Eurozone use language like “irrevocable”. Not just no exit contemplated, but treaty terms along the lines of, “Don’t even think about it”. Dunno what happens if Five Star manages to become an insurmountable force hitting an immovable object.

    2. Sound of the Suburbs

      The Euro was designed in the days when the problems with neoclassical economics had not come home to roost.

      Throwing money at the problems won’t make them go away Mario.

      Dealing with trade imbalances – A brief history in time

      Tariffs – Before Bretton-Woods

      Tariffs were the traditional mechanism for dealing with trade imbalances.

      Tariffs could also be used to allow you to catch up with more advanced nations.
      The UK was the home of the industrial revolution but the US and Western Europe didn’t want to be dependent on it for their manufactured goods. They used tariffs to get their own manufacturing sectors up to speed, protected from the cheaper UK goods.

      Tariffs went wrong when everyone used them to protect their own economy in the great depression, it killed international trade.

      Re-cycling the Surplus – Post Bretton-Woods to 1971

      To avoid using tariffs they moved to a system where the surplus was re-cycled from the surplus nations to the deficit nations to keep the whole thing running indefinitely.

      Floating Currencies – Post 1971

      The dollar was no longer pegged to gold and all currencies just floated against each other.

      Trade imbalances could now be dealt with by devaluing your currency to make you more competitive.

      Belief in Neoclassical Economics – The Euro-zone

      Despite all the mechanisms used previously to deal with trade imbalances, neoclassical economics said that the economies would naturally reach a stable equilibrium and this belief was deemed sufficient.

      Until the economies reached this stable equilibrium, debt could be used by the deficit nations to keep consumption going. According to neoclassical economics “debt doesn’t matter” despite what has happened to various South American and African nations that have taken on too much debt.

      Perhaps it is time to suspend belief and look at the reality of the Euro-zone.

  12. sunny129

    2008 crisis was primarily started with increasing financialization with mal-investments into FIRE sectors by Banksters with the complicit of CBers, captive regulatory agencies. and the corrupt politicians.

    All the structural problems were covered with debt on debt + leverage.

    Voila, Mkts zoome for the last 6-7 years.!

    Now back to square ONE!

    Guess No one saw this coming, again!

  13. Jim Haygood

    “Mr. Market took notice of the spat: European bank stocks fell, including SocGen’s.’

    EU fiddles while its banks burn. Here is a chart of the Stoxx Europe 600 ex-UK Banks Net Return Index:


    Normally, “net return” means including dividend return, adjusted for taxes. The Stoxx Europe 600 ex-UK Banks price index likely is below its 2009 crisis low [couldn’t find a public quote for it].

    A spectre is haunting Europe …

  14. Sound of the Suburbs

    Luckily for Italy it is too big to fail.

    The status the bankers covet.

    Unconditional bailouts and bonuses all round.

  15. I Have Strange Dreams

    So, it appears that banking IT systems are the new TBTF entity. The fact that countries can adopt the euro, or another, with apparent ease but cannot reverse that procedure seems highly suspect.

    1. Clive

      It’s wrong to say that the adoption of the euro for the Eurozone participating countries was done “with ease”. It took at least five years. From Wikipedia (emphasis mine):

      Retailers and government agencies had a considerable task as well. For items to be sold to the public, dual pricing was commonly utilised. Postage stamps for governments (as well as stamps issued by the United Nations Postal Administration for the UN offices in Vienna) often bore denominations both in the legacy currency and euros, assuring continued utility beyond 2001. Banks bore a huge task, not only in preparation for the change of the notes and coins, but also in the back office. Beginning in 1999, all deposits and loans were technically in euros, but deposits and withdrawals continued in the legacy currency. Statements would bear balances in both currencies beginning no later than 1 July 2001, and earlier if required by the customer’s needs.

      1. fajensen

        One might add that the Euro compatibility was an Investment, fully supported from the top. The reverse process is half bankrupt banks who now also have to pay talented specialists the going rate for 2-5 years to *maybe* be able to extricate your business from the EUR *if* forces you cannot control decides to do it? This will not fly with the board!

        The going rate is Good:

        Back around the year 2000 I had an excellent dinner and evening out in Barcelona with a nice and entertaining lady programmer from the Emirates.

        She just wanted company to celebrate the 200000 EUR bonus she was paid just to stay on the top floor of a Swiss bank over Christmas and new-year, but away from her family, babysitting the year-2000-fixed computer installations (The 200 kEUR was her “get-lost offer”, but the client took it).

        This particular year-2000-fix job took two years.

  16. I Have Strange Dreams

    What happens once a country leaves the euro?

    On financial markets a new currency first needs a new currency code that can be identified by computers for trading and payments. They are issued by the Swiss-based International Standards Organisation, a worldwide federation of national standards. It provides an alphabetic three-character code, with the first two letters representing the country and the third the name of the currency. In Greece’s case it could not go back to its old code for drachma, GRD, because there are still some outstanding payments to be made. It would require a new code, most likely GRN.

    After that, the code must be entered into software and payments systems so the computers can recognise it for payments processing and trade confirmations and other critical but unseen functions. Market infrastructure providers say this can be done in one business day if needed.

    1. Clive

      Allocating a new ISO currency code might only take a day (but that still assumes their decision making process would already have been invoked, there were no dissenting voices to the code they propose and the all the communications happens instantaneously). But let’s, as you do, wave all of that away.

      How do you envision that all the thousands of systems which take that code as a variable (I’ll ignore the inevitability that some haven’t been really naughty and hard-coded this field), test it and roll it out? Does that happen in a day, too?

      I haven’t come across this much magician thinking since my sister used to play with My Little Pony.

      1. TimOfEngland

        IHSD is not too far from the truth in my opinion, I am a programmer dealing with financial systems. Firstly 99% of this stuff will be database driven today. There will be a host of parameters for each currency such as FX, rounding rules, interest rate blah blah blah. An important set will be accepatbility in what markets and countries. The Payment Card systems would also be important. You can’t just present a payment for say your GRN to a system that doesn’t recognise it. BUT having said all that, once some one adds GRN at each end and sets the parameters for it. Most of the job would be done. Remember these are “just computer systems” and computers don’t think “Oooh whats this GRN stuff?” They will just process it like any other ISO code. There are lots of them. Anyone hard coding a currency ID/Field rightly lost their job a long time back. Our European systems may not see TZS (Tanzanian shilling) for example ever but if they did, it would not cause a problem if the other end of the links accepted it too.
        As someone said above if a new currency caused IT Failure on a massive scale people would rightly criticise the industry. Example: The proposed BTC(Bitcoin) code… we would just add in if we were going to deal in it.

        Now commercial/trade agreements, that’s different, but they are not decided or negotiated by computers.

Comments are closed.