Boring But Important: Italian Banks

Since the Brexit vote we’ve been focused on watching European banks, as they will tell us when potential anti-EU political contagion morphs into actual financial contagion (which would be a bearish game changer). And while far from an “all clear,” there have been a few positives for European banks last week.

First, the SX7P, the STOXX Bank Index, has held that 117.53 low last Thursday, which is a general positive. Second, as mentioned, there was a quietly important article from the WSJ that detailed how the European Commission is allowing the Italian government to support any troubled Italian banks, if help is needed.

Generally speaking, in the short term at least, that is a positive as Italian banks are generally considered some of the weakest in all of Europe, with badly performing loans, terrible margins and weak balance sheets. So, this authority helped reduce the chances of an immediate issue.

However, at the same time, I do find it disconcerting this had to be done. First, it’s a bit of a validation of fears about how weak Italian banks have become. Second, Spanish and Portuguese banks are not much better than Italian banks (from a strength standpoint) so in some ways this raises concerns about them as well. Finally, unlike in the US, a European country being able to guarantee banks is not always a panacea.

Remember, the Irish government was bankrupted (basically) because they guaranteed bad Irish banks, whose liabilities exceeded the government’s assets! That’s why Ireland needed a bailout.

I’m not saying the same thing will happen in Italy, and we’re a long way from that point, but when governments who can’t print their own money start guaranteeing banks, I’m afraid I get a touch nervous.

So, bottom line, we saw a short-term step forward, but it doesn’t make me any less nervous about European banks more generally.

Bottom line, sentiment is better and that’s positive, but European banks remain “Ground Zero” for any signs of contagion from Brexit, and we’ll continue to watch SX7P closely.