By Justin Spittler – Re-Blogged From Casey Research
The world’s biggest economy is unraveling.
Regular readers know we’re talking about the European Union (EU). The EU is an economic union made up of 28 countries. It was put together after World War II to keep European countries from going to war with one another.
Over time, it turned into the world’s biggest economic experiment. And, right now, that experiment is going awry.
As you probably heard, the United Kingdom voted to leave the EU a month ago. The “Brexit,” as folks are calling it, shook financial markets from London to New York City. It knocked more than $3 trillion from the global stock market in two days.
Then, things calmed down. Over the past three weeks, global stocks have regained more than $4.5 trillion. The S&P 500 and Dow just hit new all-time highs. Many folks now think things are OK in Europe.
As you’re about to see, things aren’t fine. That’s because Europe now has a much bigger problem than the Brexit. Italy, Europe’s fourth biggest economy, is racing toward a full-blown banking crisis.
Today, we’ll show you why this isn’t just a problem for Italy. It’s a serious threat to all of Europe. One of our analysts even says Italy’s banking crisis could trigger the end of Europe as we know it.
• Italy’s banking system is a disaster…
Financial Times reported last week:
The amount of gross non-performing loans held by the [Italian] banks increased 85 per cent to €360bn in the five years to 2015…
The total stock of bad debts — the most distressed part of the pile — more than doubled over the same period.
Non-performing loans, or “bad” loans, are loans that trade for less than book value.
According to Financial Times, non-performing loans currently make up 18% of all of Italy’s loans. To put that in perspective, U.S. banks had a non-performing loan (NPL) ratio of 5% at the height of the 2008–2009 financial crisis. In short, Italy’s banking system is sitting on a keg of dynamite.
Yesterday, The Wall Street Journal explained how Italian banks got themselves into this mess:
Bad loans have grown at the astounding pace of €50 billion ($55.05 billion) a year since the 2008-09 financial crisis as banks resisted writing down bad assets. Banks and policy makers awaited a strong economic recovery that would allow debtors to repay more of their loans while providing banks greater profits to cushion write-downs. The recovery didn’t materialize, and the money injected into banks, up to €80 billion, via periodic market recapitalizations quickly dissipated as bank profitability stagnated due to an inefficient, fragmented financial system and near-zero or negative interest rates.
• In other words, Italy’s banking system has three big problems…
1) The banks never recovered from the financial crisis. 2) Italy’s economy isn’t growing. And 3) negative interest rates are killing Italian banks.
Dispatch readers know negative rates are a new radical government policy. They basically turn your bank account upside down. Instead of earning interest on your money at the bank, you pay the bank to watch your money.
The European Central Bank (ECB) introduced negative rates two years ago, hoping this would “stimulate” Europe’s economy. Today, the ECB’s key rate is at -0.4%. That means European banks must pay €4 for every €1,000 they keep with the ECB.
That might not sound like much. But it’s a huge problem for European banks that oversee trillions of euros. According to Bank of America (BAC), European banks could lose as much as €20 billion per year by 2018 if the ECB keeps rates where they are.
• Italian bank stocks have nosedived…
UniCredit SpA (USG.MI), Italy’s largest bank, has plunged 63% over the past year. Intesa Sanpaolo (ISP.MI), Italy’s second biggest, is down 45%. Banca Monte dei Paschi di Siena (BMPS.MI), Italy’s third biggest, is down 83%. And Banco Popolare (BP.MI), Italy’s fourth biggest, is down 79%.
These are giant declines. Remember, we’re talking about the cornerstones of Italy’s financial system.
Right now, these stocks aren’t telling us everything is OK. They’re saying Italy’s banking system could be insolvent.
• The ECB might bail out Italian banks…
Yesterday, Mario Draghi, who heads the ECB, said he would support a public bailout of Italy’s banks “in exceptional circumstances.”
If this happens, the government will give money to Italy’s troubled banks and make taxpayers pay for it.
If this sounds familiar, it’s because the U.S. government did the same thing during the 2008–2009 crisis. It gave hundreds of billions of dollars to the largest U.S. banks because they were “too big to fail.” The average American ended up footing the bill.
• Italian bank stocks jumped on Draghi’s comments…
Banco Popolare rose 4.0% yesterday. UniCredit rose 2.1%. And Banco Monte dei Paschi di Siena closed the day up 1.8%. In other words, investors are betting on a bailout.
Nick Giambruno, editor of Crisis Investing, also thinks this will happen. He says Europe doesn’t have much choice:
Italian banks will be bailed out, somehow, someway. Italy’s systemic weight is too big. A collapse of the Italian banking system is an existential threat to the euro, and probably the whole EU project.
Nick, who’s in Italy right now, doesn’t think a bailout will fix Italy’s problems. At best, it will buy Europe time. Nick explains:
A bailout won’t fix Italy’s main problem. The country hasn’t had any meaningful economic growth since it joined the euro in 1999.
Even if a bailout can postpone a collapse of Italy’s banking system, it wouldn’t prevent a bubbling political crisis.
You see, right now, a populist party is gaining control in Italy. According to the polls, it’s the most popular party in the country right now. And it’s gaining followers by the day.
Nick says this is something investors can’t afford to ignore:
The populist party blames Italy’s economic problems on the euro. It wants Italy to go back to the lira, its old currency.
• Nick thinks the populist party could rise to power as soon as October…
If this happens, Italy will likely hold a referendum like the UK did. But, this time, Italy will decide if it wants to stay with the euro or go back to the lira.
If Italy votes to leave the euro, the fallout could be far worse than what we saw with the Brexit.
Italy leaving the euro would destroy confidence in the currency. Longtime readers know this could be devastating. Like all paper currencies, “confidence” is all that backs the euro. If people lose faith in the euro, it will literally become worthless.
Nick says this could happen sooner than most folks think:
Italy is the third largest country in the eurozone. If it leaves the euro, I think it would destroy the currency. Without the euro, the economic linkages between EU countries would weaken. This could be a fatal blow to the EU itself.
Bottom line, the euro and the whole EU project could very well die in Italy over the next six months.
• Nick says a collapse of the EU could be “the biggest geopolitical event since World War II”…
It could trigger a global stock market crash. It could drag the world into a deep depression. It could spark a global currency crisis.
There’s really no way to know what would happen. Like we said earlier, the EU is one of the biggest economic experiments in history.
If you’re worried about the state of the EU, you need to protect yourself. Your first step should be to own gold. As we often say, gold is real money. It’s protected wealth for centuries because it’s durable, easy to transport, and easily divisible. Its value also doesn’t depend on any central bank or government.
If the euro runs into problems like Nick expects, gold’s value could rise dramatically.