Europe’s fourth-largest economy, Italy, is heading towards a major banking crisis. According to the Financial Times, the amount of gross non-performing loans held by the Italian Banks increased by 85% to 360 billion euro in the 5 years preceding 2015. The total stock of bad debts (those most distressed that trade for less than book value) more than doubled over the same period. The FT reported that these bad loans make up 18% of all of Italy’s loans. It appears that the banks never really recovered from the financial crisis. The economy has been stagnating for years and negative interest rates are plunging the banks into a deeper hole. The ECB’s key rate is -0.4%. The ECB chief Mario Draghi has stated he would support a public bailout of Italy’s banks in exceptional circumstances. The question is who foots the bill?
Italian bank stocks have fallen significantly over the past 12 months. The largest bank in Italy, Unicredit Spa has seen it’s share price drop by 63%, Intesa San Paolo is down 45%, Banco Monte dei Paschi di Siena has plunged 83% and the fourth biggest bank, Banco Populare has seen it’s share price shed 79% of it’s value over the past year. Draghi’s comments boosted shares at the end of last week pointing towards an eventual bailout. The collapse of the Italian banking system would threaten the Euro and the EU at this fragile time. Italy has seen poor growth since 1999 and the major worry is the rising prominence of the euroskeptic 5 Star movement, which blames Italy’s economic woes on the Euro. The party is calling for a return to the Lira and a referendum on eurozone membership. A political and financial collision course awaits.
New European rules state that bondholders must take a hit should a bailout occur. However, one third of Italian bank bonds are held by household retail investors. Therefore, Prime Minister Matteo Renzi faces a dilemma. A taxpayer bailout will anger the electorate while failure to protect the bondholders also carries it’s own risks. European officials must weigh up the prospect of following their own rules and burning bondholders (many Italian retail investors) thereby igniting a political crisis that could threaten Renzi’s leadership and open the door to the populist party.
These are worrying times for the Euro and the EU. The ultimate insurance policy for investors is to hold tangible assets that do not depend on any central bank or government. We like Precious Metals such as Gold and Silver because they have protected wealth for centuries. Currency debasement, negative real interest rates and unsustainable debts and deficits worldwide are a catalyst for precious metals and owning them will preserve your wealth during a monetary crisis. There have been 600 interest rate cuts around the world since mid-2007. 41 countries now have negative real interest rates. 550 stimulus policies (money printing) have been announced since the dawn of the last crisis. It is common to take out an insurance policy for our health, mortgage, travel etc yet the vast majority of people keep their savings in the bank oblivious to the risks inherent in the financial system without any hedge to cover the risk. The ownership of gold and silver offer this hedge and we recommend 10-15% of savings should be held in physical gold outside of the banking system. With interest rates turning negative and gold up 20% this year and silver 40%, the old chestnut about gold being a non-income producing asset becomes less of an issue. Consider it your very own insurance policy for your savings and expect the price to rise long term with pullbacks along the way. After all nothing moves up in a straight line in the markets.