Apr 4, 2017 | 18:05 GMT

2 mins read

Italy: The Banking Crisis Ripping at the Threads of a Continent

Two banks from Italy's northern Veneto region, Popolare di Vicenza and Veneto Banca, have both reported their 2016 figures in the past week. The figures show losses of 1.9 billion euros ($2 billion) and 1.5 billion euros, respectively. Both banks are requesting state bailouts to replenish their capital reserves, since they currently do not meet European requirements. Though the banks are relatively small, their troubles are symptomatic of much bigger problems. There is currently a total 360 billion euros of non-performing loans in the Italian banking system, making the sector extremely fragile. In such a weak system, small banks have outsized influence, both in setting precedence for how larger banks in trouble are treated and in causing investors across the sector to re-evaluate their investments.

Popolare di Vicenza reported sizable deposit outflows last month, as investors fled fearing losing their money in what is known as a bail in before the government would consider a bail out. It's a fear that investors at other banks share. Such a crisis has already been averted once: In December, Italy's fourth largest bank, Monte dei Paschi, was allowed to receive state aid without its investors being bailed in, in what was called a "precautionary recapitalization." But it's unclear whether that solution could be replicated. The deal, which is still being worked out, was based on a technicality related to a stress test carried out on Monte Dei Paschi last summer that other banks might not share. 

Italy is dragged down by the highest debt levels in Europe and is preparing for an election within the next year, which could easily empower a Euroskeptic government. The Southern European country is not in good shape to weather a banking crisis, but it may well be forced to deal with one — and that won't be good news for an already divided Europe.

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