Italian banks, this is euro area politics. We think you already know each other?
Italian banks are a problem. Post-Brexit they’re a serious problem....MORE
A full recap of said banking sector and its estimated €200bn of gross non-performing loans would, according to JPM, “require up to €40 billion (less than 2.5% of GDP)”.
Manageable, say JPM again, “given the current Italian fiscal position and sovereign cost of funding.”
Only problem is…
…the new banking regulation (the BRRD) in place in the region since 2015 rules out what circumstances would suggest as the most reasonable and painless approach, i.e. a government sponsored systemic solution (either a bad bank along the lines of NAMA and SAREB in Ireland and Spain or a fully fledged bank recap). According to the new rules, any government funding is conditional on pre-emptive burden sharing, which amounts to wiping out/haircutting private investors’ stakes in the banks’ capital (equity, subordinated and senior debt). In our view, such an approach would be extremely risky and ill advised, and the likely burden sharing of retail-held bonds would send shock waves across the domestic depositor base.
[Do note the retail bit here -- NYT have said that "families own about a third of Italian banks’ debt securities" and as we get to below "Dan Davies, senior research adviser at Frontline Analysts, says the Italian government could argue that forcing losses on retail investors would fall under that exception."]...
Also from Mr. K., a tweet I was going use as a stand-alone post and give some solemn law-book sounding title, maybe "Keohane On Positioning", a comment on foreign exchange that also explains one of the reasons we don't talk much about the Commitment of Traders reports when discussing commodities. The COT's don't help all that much on direction:
GBP positioning (before Leadsom weighed in, obvs) is at extreme levels but that's less directional, more vol -- HSBC pic.twitter.com/ivMn3o6MYl— David Keohane (@DavidKeo) July 7, 2016