What's going on?
The world’s oldest bank, Italy’s Banca Monte dei Paschi di Siena (BMPS), announced plans to raise more money from investors – that might just help stave off an impending Italian banking crisis.
What does this mean?
After markets closed on Friday, the European Banking Authority released a report on how European banks would fare in the event of stressful scenarios like a significant economic recession. Most banks, in their analysis, would perform well (with some exceptions), but the worst performer was BMPS.
This wasn’t a surprise – problems at BMPS have been brewing for years. Just ahead of the report’s release on Friday, BMPS announced its plans to raise fresh investment (i.e. selling new stock to investors). However, a major question remains: will enough investors step up to buy the new stock? If not, the Italian government might have to directly support the ailing bank.
Why should I care?
For markets: Italy’s struggles are real.
Italian banks (not just BMPS) have made too many loans that are not going to get repaid. That means they could struggle to pay back people that have lent them money, including many ordinary Italians. The Italian government would like to give the banks money to help them – but under European Union rules, lenders to banks have to lose some of their money before a country is allowed to “bail out” its banks. That would be a political nightmare for the Italian government, which faces a crucial referendum later this year that, if lost, would likely lead to the Prime Minister resigning and a lot of political turmoil.
The bigger picture: The potential for contagion is significant.
A failure to find a solution to Italy’s burgeoning banking crisis threatens the very viability of the eurozone (think: a banking crisis leads to a political crisis and then a re-run of the Greek debacle, although involving a country that is much larger and more important to the European project). BMPS’s actions might be a step towards solving the problem – but it’s far from clear that it’s a big enough step.