Are We Seeing the Return of Glass-Steagall – in Italy

The Italian government has just announced some much-needed banking reforms.  One measure that sticks-out is its intention to split commercial and investment banking.  Repeal of the Glass-Steagall act was blamed, by many, for the last financial crisis in the US.  But, for Italy, is it too little, too late.

Anyone who follows international news or has the slightest interest in economics will know that Italy is, basically, pretty much of a basket-case.  The last 6 months of 2018 saw the country enter yet another recession.  With growth rates, since it entered the Euro, almost flat-lined its GDP is still well below the pre-financial crisis 2008 level.  Crazily, for a country that has regularly recorded a primary surplus, its sovereign debt to GDP ratio is around 130%- and has been at that level for some years- just a notch below the self-feeding frenzy mark of 140%.

If only that were all.

The European Central Bank’s Quantitive Easing has hoovered up all of Italy’s debt issuance over the last few years.  As the ECB winds up QE, against the curve and in the face of a slow-down, it’s hard to see how Italy is going to roll-over its required several hundred billions over the next year.  By any measure, the country’s banks are insolvent.  Bad debt ratios have barely altered since financial crisis.  There has been no clean up.  Bank capitalization is on very shaky round, with recession sure to see the situation deteriorate.

Things could hardly be any worse.  Except they could.  Last year Italy elected a coalition far-left and far-right government.  This Lega-Five Star coalition produced an expansionist budget in the face of staunch EU opposition.  Yes, in Europe, the EU has to approve each country’s budget- especially if it is likely to exacerbate an existing budget deficit.  A temporary truce was called at the end of last year, but the whole thing was predicated on Italy achieving growth figures which were, clearly, over-ambitious and highly unlikely to be met.  The country’s lurch into recession bodes ill for its relationship with its EU masters.

The collapse in the Eurozone has been oft-anticipated, with few understanding the political will behind the project: evidence the on-going catastrophe in Greece.  But with youth unemployment above 30%- in the south much worse- thanks to EU-imposed austerity measures; Italy’s populist government will have plenty of electoral support for it’s battle with the Brussels bureaucrats.

For now, the financial world watches and waits.



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