Tuesday, April 12, 2016

Italy's Euro 360 billion NPL -- a Euro 5 billion Band-aid

So the Italian finally made their plan known to address the country's commercial banks' mounting Non Performing Loan problem.  So far the total bad loans is around Euro 360 billion -- one bank is responsible for nearly Euro 80 billion.  The proposed capital is Euro 5 billion, so just a big more than 1%, giving the bad bank a total leverage of 100:1.  That's really going to work.  Not only that but the loans that have already gone under have total losses of more than Euro 5 billion.

To say that the market was underwhelmed would be an exaggeration; to be honest the market expected this kind of lame answer.  First, because the ECB has made it hard for the Italian government to save its banks, and secondly, because the Italian government is broke and third so are the banks that need every penny of capital they can lay their hands on.

Over the past 12 months, the Italian market has lost nearly 1/3 of its value (so not as good as the US markets...).  Italian banks remain in the dump, which makes it almost impossible for them to raise fresh capital.

In fact, Italian banks were stopped out today -- limit down.

The question is therefore:  Now what?

This is a very important question, because rumors are that Italy is just the sharp end of the stick, and that other banks are facing similar conditions.  DB -- not to single out, but still, has some terrible number of late, and the reorg is not going too well -- stories are that the rainmakers are having a terrible time, and the recent cancel M&A activity also means that 2016 is going to be a very very bad year.  Please note that all the deal death was caused by the IRS change rules that made it difficult for American firm to re-domicile in the target's "home country"  -- read Ireland.

These multi billion dollar deals were going to be major money makers, now three massive deals (we are talking nearly USD 500 billion in M&A deals died over the past 10 days.

So other banks are feeling sickly, in this age of communication -- contagion cannot be far off.  The issue with Lehman (which was a small institution) was the knock on effect.  As Donald Rumsfeld once said; there are things we know, there are things we know we don't know and then there are things we don't know we don't know -- the last is the real problem.  For banks the world over the problem is the same; they have no idea from where the next punch will come!

At least Italy knows the scope of its problem (even if they have no idea how to solve it)


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