The year began with a financial shock: Banca Carige, the tenth largest financial institution in Italy, based in Genoa, was the subject of European Central Bank (ECB) intervention. This is really related to something quite familiar: since the Renzi Government (February 2014-December 2016) up to four banks have needed rescue. Additional financial institutions fell over time, with the fall of Monte dei Paschi di Siena (MPS), then the third largest bank in the country after Unicredit e Intesa San Paolo, outshining the rest. The most notable in this regard was the bail out that took place with the “approval” of the national populist coalition that has been governing the country since last June, as both parties making up the Executive branch had promised their voters during the campaign leading up to the elections on March 4 last year (to gain the trust of the Italians) that their government would never give any money to a financial institution if it needed it. With this, they looked to differentiate themselves from the actions of the last two executive branches (led by Matteo Renzi and Paolo Gentiloni).
Indeed, in November 2015, Matteo Renzi, then head of the Council of Ministers, had to bail out four small banks. The problem is that at that time attention was distracted from the background of one of the bailed out banks. Why is this? Because the vice president of Banca Etruria was Pier Luigi Boschi, father of the then brand new minister of Constitutional Reform, Maria Elena Boschi. The evidence showed that Banca Etruria was on the verge of bankruptcy, because, despite having received public aid, it had to be liquidated. However, what had been seen by the Italians was that Renzi had been party to a flagrant a conflict of interest that would have been prevented if either Pier Luigi Boschi or his daughter had resigned during the unsuccessful restructuring process.
In any case, this matter caused great damage to the reputation of the then rising prime minister Renzi, who was quite popular in the always complex Italian political scene. After that point, everything would be much more difficult for him. The reason for this was that, unlike the previous government, which lasted a year and a half, he was seen as part of the reviled Italian “caste.” Proof of this is that one year and one month later, Renzi clearly lost his constitutional referendum and, similarly, in March 2018, he was thrashed in the general election, where the electorate overwhelmingly turned their backs on him. In this respect, although such a talented politician cannot be discounted, time is showing that he is going to have a difficult journey to get back to leading the Council of Ministers if he ever even makes it, but everyone knows that anything is possible in Italian politics.
The truth is that the populist Five Star party, as well as the ultranationalists of Lega Nord, did not have any other alternative than to get realistic and allocate money to public funds, contrary to what they had promised their voters in the campaign that brought them to power with a wide majority. What everyone in Italy is wondering now is: were public funds injected into Banca Carige because it was in bad shape or because others could fall after it? I’m afraid it is actually the latter, as the transalpine nation may be on the brink of suffering a collapse of its financial system for having spent years doing nothing to prepare.
Essentially, the current banking crisis goes back to 2009, when the country’s GDP contracted more than five points and numerous Italian banks had to issue many loans to businesses that would have otherwise gone bankrupt immediately. The problem is that, after this crisis, the economy hardly recovered: the year when the national GDP grew most was in 2017, with growth of 1.6%, but between these two dates there were strong contractions of the economy, like the one in 2012, with a decrease of 2.8 percentage points or in 2013, with a decrease of 1.7. This had direct consequences on companies’ ability to receive loans to pay back their creditors.
Italian banks actually should have been restructured in the same way Spanish banks were in 2012, but that also did not occur for two fundamental reasons: first, because Italy had a much lower margin for taking on debt than their Spanish neighbors (at the end of 2011 Italy’s debt over the GDP was 116.5%, while Spanish debt was at 69.5%, a difference of almost 50 percentage points); and second, because, while Spain no longer had a presence in EU monetary institutions (we only had José Manuel González-Páramo), Italy had none other than the former governor of the Bank of Italy, Mario Draghi, leading the ECB, in addition to other transalpine representatives (the most paradigmatic case being Andrea Enria, but there are others). Additionally, the Italian panorama was not exactly ready to carry out a drastic restructuring like in Spain, because it was already difficult enough for Italians to assimilate the forced resignation of the Fourth Berlusconi Government and its replacements with the non-political government led by economist Mario Monti, all of this as a result of a decision of the so-called troika (IMF, ECB, and European Commission).
The issue is that the years went by and, except for the occasional merger, nothing was done to carry out a broad reform of a sector that was calculated in December 2016 to have a portfolio of around 350 billion non-performing loans. In the case of the recently bailed out Banca Carige, this kind of loan accounts for 27.5% of its total capital, compared to the national average, which is estimated (although no one knows for sure) to be around 13%.
It is true, in the specific case of Banca Carige, the populist government’s actions cannot be said to have nothing to do with the debacle of this institution. This is because Banca Carige is directly associated with the economic activity of a port as important as the one in Genoa, and this port has lost part of its business after the Morandi bridge partially collapsed (you’ll recall that over 100 meters of the structure fell to the ground) in August. The current Italian executive branch is not responsible for the bad shape the bridge was in (something solely attributable to the concessionaire, Autostrade per l´Italia), but the populist and nationalist coalition can indeed take the blame for having taken more than four months to award the construction of a new bridge by presidential appointment to the celebrated Genoan architect and senator Renzo Piano.
I am saying this because the most serious aspect of all of this is that Piano filed the fully completed project for the new bridge with the city council of Genoa the last week of August, but the constant debates about whether it should be rebuilt by the state (as demanded the Five Star movement, albeit, on Autostrade per l´Italia’s dime) or if it should accept the bid that this concessionaire made before the end of August to rebuild it themselves within a period of eight months, has led to an excessive amount of time to make the decision, with the Genoan bank quite seriously harmed by the shutdown of part of the business of a port that provides a great deal of raw materials and products to companies in Lombardy and Veneto, which in turn export to the entire world.
The question is when will this restructuring occur to prevent other banks from falling like dominoes? Nevertheless, the current Italian government would do well to take advantage of the months Mario Draghi has left as head of the ECB (he leaves office in October of this year) before his position is filled by an ultraorthodox economist who decides to take more drastic measures. Draghi already said that Europe has too many banks and that the whole of the EU should have a maximum of 50, but the reality is that the number of banks just in the northern half of his country already exceeds this figure. Once again, the Italian government is sine die delaying the resolution of a problem that may be extraordinarily serious and that in more than one case may affect banks considered “systemic” like Unicredit. It is simply a matter of time.