It’s eight years on from the banking crisis. Yet we’re ending the year with another bailout.
It looks like the end of the line for the world’s oldest bank.
Or rather, the end of this particular incarnation as a private entity. Banks don’t really die these days. They regenerate, Doctor Who-style, sloughing off their old identities and leaving someone else to pay off their bad debts.
So who’ll end up carrying the can for Italy’s Monte dei Paschi di Siena?
Why Italy’s banks are in trouble
Italy’s Monte dei Paschi has been a festering sore for most of this year. If it wasn’t for all the other exciting stuff going on elsewhere, I imagine it could have hogged more headlines.
Let’s recap on why Italian banks are in trouble. Even by the standards of eurozone banks, Italian banks have lots of bad debt. That’s mainly because the Italian economy doesn’t seem to be capable of growing anymore.
There are lots of reasons for that. Most of the structural ones boil down to the fact that Italy is not Germany. If it were, it would be growing. But it’s not.
In the olden days, it didn’t matter that Italy wasn’t Germany. That’s what flexible currencies are for. But once Italy got the euro, it couldn’t devalue its way out of trouble anymore. So it’s had about 20 years of barely-there growth instead.
On top of that – unlike its Spanish counterparts – the Italian government never quite took the time to come up with a way to fix its banks. That’s a problem, because at the start of this year, the eurozone adopted new rules that mean you can’t bail out a bank without stiffing at least some of its creditors first.
In Italy, those creditors include small investors, who were sold bank bonds as being equivalent to savings accounts. If the rules were to be followed strictly, you’d have to wipe out the savings of a whole host of voters. That’s pretty much the definition of political suicide.
So that’s the background. Now we come to Monte dei Paschi. The bank has been looking to raise €5bn of capital in the private market. It needed to do it by lunchtime today. Now the last big hope – the Qataris – have said they don’t fancy stumping up the cash.
That means the only alternative to the bank collapsing is for the Italian government to prop it up. The parliament has approved a €20bn plan, which involves Italy taking on yet more debt (its debt/GDP ratio is already 133% – only Greece is worse within the eurozone).
Saving the world’s oldest bank and landing someone else with the bill
So what happens next? If there’s one thing that everything that’s happened since Lehman Brothers has taught us, it’s that there does not need to be a disorderly collapse of the Italian banking system, and that the authorities really don’t want it to happen.
So here’s what happens. The Italian government steps in to bail out the bank. They get around the “no bailout” clause by reimbursing the individual Italian savers for the losses on their bonds.
“No voters were harmed in the bail-in out of this bank.” That’s all the Italian authorities need to be able to say.
That prevents a panic, it sets a template for the rest of the system, and it means the European authorities can pretend that the rules were followed.
There are consequences, of course. This is not cost free. Where does the Italian government (already heavily indebted) get the money to bail out these banks?
Well, money printing by the European Central Bank, of course. That’ll eventually show up in the inflation figures – most likely in Germany.
As Frederic Bastiat pointed out in 1850, economics is all about that which is seen, and that which is not seen. Someone always pays. And not always the person who should be paying.
But politics is all about making sure that the apparent salvation of the system is “that which is seen”, while the bill ends up firmly in the “that which is not seen” category.
Eventually, I suspect, the Germans will get fed up. When an explicitly anti-euro (rather than far-right) party starts to gain traction there, that’ll mark the trigger for the disintegration of the single currency. But it might be some way off.
There is nothing non-negotiable about the EU’s rules
Meanwhile, I would also like to point out that this once again highlights the European Union’s extraordinary flexibility when it comes to making exceptions to the rules.
So if the EU decides that it wants to make Brexit “difficult” for the UK – and it may well do, whether out of a misguided sense of “pour encourager les autres”, or a simple desire to stick it to the arrogant Anglo-Saxons – then we must understand that it’s a political choice.
The “four freedoms” are not inviolable rules of physics, as they are often presented in the press. They’re guidelines that are only applied as aggressively as the most powerful EU member states dictate.
So Brexit can be an easy, win-win situation. Or it can be a hard, lose-lose one. I hope it’ll be the former. But there’s an entire bureaucratic structure that feels its existence is threatened. So I don’t necessarily expect reason to win out.
That’s why when we sit down to the negotiating table with our allies in Europe, we should be quite prepared to meet huffy hostility with reasonable smiles and an absolute willingness to pursue a hard Brexit before the end of 2017.