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Italy is trying a €20 billion experiment with its banks to see if anyone cares about 'moral hazard'

Wednesday, Dec 28 2016
Italy is trying a €20 billion experiment with its banks to see if anyone cares about 'moral hazard'

The price of the government bailout of Monte dei Paschi, Italy's oldest bank, went up from €5 billion to €6.5 billion euros ($6.8 billion) this week. That happened after the European Central Bank discovered that MPS's capital shortfall was €8.8 billion, and not the expected €5 billion euros. There has been a "rapid deterioration" in MPS's outlook, according to the Financial Times.

The government has so far allocated €20 billion to bail out all its banks — which are riddled with non-performing loans — but the actual amount the system may need to avoid collapse is probably nearer €52 billion, according to Barclays bank analysts Fabio Fois and Giuseppe Maraffino. There are €360 billion-worth of impaired loans in the entire system, the equivalent of about 20% of Italian GDP. So the crisis is big enough to affect the entire Italian economy if it is mishandled. But the more damaging fallout may be political rather than financial. The bailout is essentially a €20 billion bet that Italian voters don't care about "moral hazard."

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