Friday, December 9, 2016


The ECB and the EU  (Germany) today denied the request of Monte di Paschi (Italy's) to delay their capital raising exercise until 2017 due to the fall of the Renzi government.   As suggested, the Northerns would love to see Italy nationalize the bank despite all sorts of rules against such actions (to be fair there is a a route to be followed) and the Italians may do just that.  This is entirely a political game now as the thought of bailing out an Southern tier bank...especially an Italian verboten guess where.  So here we sit, going into the weekend with markets in disarray Over There and the thought of what this just might mean.

The Italians, it seems to me, have little choice.  New equity from private sources is out of the question but without the possibility of the same I would think that we will see a run on the institution leading to certain failure without intervention.  However, if the bank were to be intervened by the Italian government the political cost will be enormous.

Monte di Paschi is Italy's oldest bank; indeed, one can say it is Italy.  Intervention by the government would  undoubtedly result in total losses for subordinated debt holders, major losses for senior bond holders and a wipe-out of all equity for all practical purposes.  The debt and equity of this bank is not held by funds: much of it is owned by the Italian public because of the bank's history and status.  What looms before us would have been unthinkable a few years ago.  To many it is unthinkable today.  The decision to be made over this weekend--if one is to be made--will probably shape the future course of Italy and I suspect the European Union as well.  What may have to be done will probably insure the election of a coalition dominated to a great extent by 5 Star thinking and resulting in first, the rejection of the Euro as a currency (or some sort of crazy dual currency experiment) and ultimately, the exit of Italy from the Union.  And that will be that: The Fat Lady will have sung.  Finito.

So, what was to be, in my mind, a fairly quiet weekend and year end is turning into perhaps one of the most momentous weekends in European history...or not.  This is one hell of a game of chicken being played and for not the first time Angie and the boys may have misjudged things.  I must admit that I am not well-enough versed in the details of the rules and regulations Over There concerning matters such as this so there may be some wiggle room, but from what I can presently see, there isn't. The Italians have but one card to play and if they play it...

Have a great weekend.

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