Why don't the machinations surrounding the possible destruction of the world's oldest bank, Italy's Monte dei Paschi, play a larger, more negative role, in this week's trading?
How can the potential collapse of a bank with 169 billion euros ($177 billion) in assets, the third largest in Italy, with more than 45 billion euro in debt, not create a far bigger ripple here, given what we have seen in the last decade out of Europe and its interrelation to U.S. banks?
Are we whistling past this graveyard of a storied bank that will wipe out the savings of the hundreds of thousands of pensioners who rely on its subordinated debt for income?
I've got a few theories that speak to the real issues behind the lack of linkage and what it really means for the market going forward.
First, Monte dei Paschi is a zombie bank and has been for years. It's got, by some accounts -- it is all pretty murky -- 50 billion euro in non-performing loans, 38% of its loan book; an unfathomable amount, and one that would have led to a seizure years ago by even the most braindead of regulators in this country. Heck, a bank with 3.8% of its loans non-performing is pretty much insolvent. But 38%? I mean, please. This one's been a dead duck since 2010, when we first realized the magnitude of the situation.
It's obviously in much worse shape than the second largest bank, Unicredit, which just completed a 13 billion euros rights offering, boosting capital while at the same time selling a huge book of bad loans to Fortress Investments and Pimco. The radical actions taken by Unicredit appear to have that bank on much firmer footing. But I don't think that the same thing could be done at Monte dei Paschi, because the loans seem to be more sour and the management less adept at dealing with its problems, to put it politely.
So, there's no surprise factor.
Second? I think that Italy itself has been written off as an important country in Europe even as it has the third-largest bond market in the world, because once the EU decided to protect the nation's sovereign bonds and the rates came down to the point where each issuance wouldn't break the budget, the whole affair became a yawner.
That's a rather staggering development, when you think that five years ago when Italian 10-year rates were at 7% the whole world was hanging on to each sovereign auction. Now, with a 10-year Treasury rate of 1.82%, nobody cares, even as its banks have a staggering 360 billion euros in bad debts, all told.
However, as long as the sovereign debt is basically insured, individual bank debt attached to those bad loans doesn't mean that much, including the 5.0 billion euros subordinated debt purchased mostly by Italians in the last few bailout attempts. It will be crunched, people will be hurt, but then recovery can begin. As we have seen elsewhere, though, it can't begin until the crunch occurs and the problems are at last dealt with.
Third, Italy's economy has been faltering for years and while we often hear it is because the country is uncompetitive as labor force and is shrinking demographically, I think the real issue is a total lack of a working banking system. It's just plain scary to do business there if you think that the bank you are dealing with is going under.
That's about to change, and I think that a state-run Monte dei Paschi would be a good thing for Italy except for all of the individuals who own the bank's debt. Those people are going to want Italy to leave the EU for certain in reaction to the bank's collapse, which, again, might force the German-controlled organization to start spending to grow Europe. That could be an important part of the reaction to Italian nationalism. Or in other words, Germany's going to have to start sharing the wealth it has taken out of the EU with lesser countries like Italy by having some fiscal spending to grow the continent, not just its country.Finally, the linkage between our banks and their banks has broken off. Our banks are now so big, with so much capital, that the numbers being thrown around out of Europe's ailing bank sector, as large as they are, seem like a drop in the bucket. In short, none of the big banks in Europe, whether it be Monte or Deutsche ( DB) or Credit Suisse ( CS) , or any of the London banks seem big enough to hurt us anymore. That's what happens when responsible regulators demand better balance sheets, which is what happened here a long time ago and is just, at last, happening in Italy.