Wednesday, January 18, 2017

From La Dolce Vita to Brutto Vita

One of the global risks in 2017 will be the state of Italian banking. The IMF recently declared that Deutsche Bank of Germany as the riskiest in the world. Dear reader, Italian banks as a whole industry is in the worst shape compared to any other banking industry. As a group, they have the most non-performing loans than any other Western nation. Why are their loans in such a sad condition? I do not know, but I have my suspicions.
As a member of the European Union, they are subject to price limits, quota exports and currency value. In addition, their yearly budget can only fall 3% below balance. This got me thinking that my fellow pisans are suffering from the same ills of globalization just like we do in America. We lost our electronic industry and most of our manufacturing too. I think the Italians lost their motion picture industry along with many other businesses. When I was young, the choices for a flick generally included foreign films. I was not a big fan of English movies, but the Swedes and Italians made some good genres. In my opinion, the best cowboy movie ever was, The Good, The Bad, and the Brutto. Today, we never see a flick from them or from anyone except the English and Chinese. The movie industry hires many types of people from costumes to carpentry and lighting to computers. Consider what would happen to Los Angeles if Hollywood dies? How many business loans and mortgages would crumble? I could see small Italian firms suffering from this loss of business. Here are a couple of their leading banks.
World's Oldest Bank
is the Italian institution, Monte dei Paschi di Siena. It just received a government bailout of 5 billion euros. Even with this cash flow, the bank is still stuck in the mud.
Another Italian behemoth is UniCredit. They are seeking to raise 13 billion euros with a rights-offer to which is exactly the current market value of the company. You buy this offering and the one sure outcome will be the value will decrease by 50%.
Both of these companies will approach the European Central Bank(ECB)with their plan to go forward. Germany doesn't want to throw good money after bad = big obstacle. What will happen? Only the Shadow knows, but the ECB will do the waiting game like with Greece. They hope with time that things will turn a corner. Nevertheless, this means more low or negative financing at a time when the US central bank is raising rates. This also implies a strong dollar compared to the Euro. A smart move by European citizens would be to buy gold to protect their own economic situation. Anyway, you throw the pound into the mix with Brexit and you have currency volatility. Not good. However, as in the US, the EU will find ways to tax which should bolster the euro and their banking system. This is why the sweet life in Italy has turned ugly.
Tax and spend across the pond? It will sound like the influence of the Democrats onto the socialist continent. Who would've thought ? In this year of the rooster we may not find Rocky Balboa chasing the bird, but governments looking for revenues.        

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