Despite the Hype, Italy’s Banking Crisis Metastasizes

The government’s giant debt is already “vulnerable to market turbulence.”

For the last five months, Italy’s third largest bank, Monte dei Paschi di Siena, has been locked in talks with the Italian government, the European Commission and the ECB’s regulatory arm, the Single Supervisory Mechanism, over the design of a taxpayer-funded rescue. The negotiations have no led to a preliminary rescue deal, prompting speculation that Italy’s banking sector may finally be on the mend. But the progress has been painfully slow and as time drags on, the deep-seated problems affecting Italy’s broader banking system continue to metastasize.

Bank of Italy Governor Ignazio Visco warned on Wednesday that weaker Italian banks that will probably have to sell off large chunks of their non-performing loans could face additional write-downs of around €10 billion.

“If they were sold at the very low prices offered by the few large specialist debt collection agencies active in the market today which pursue very high returns, the amount of additional write-downs would be in the order of €10 billion,” Visco said at the central bank’s annual meeting in Rome, which was attended by his predecessor in the role, Mario Draghi. Italy’s most troubled banks, those that could be forced by regulators to write down loans, currently hold €20 billion in bad loans net of write-downs, Visco added.

But €20 billion also happens to be the amount the Italian government set aside at the beginning of this year to bail out the entire banking system – not just a few of the worst-off banks. It’s unlikely to be enough

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