While everyone is focused on a Chinese economic slowdown and the risk of a currency devaluation – and rightly so – we are increasingly concerned with the state of the Italian financial system. By financial system, we mean to include the banking system and the state of the government balance sheet.

As you will see, the Italian economy is weak, the banking system is in distress and government borrowings are too large to “bail-out”. Much of this is not new and has been the state of affairs for many years now. Yet recent and potential future policy decisions are giving cause for concern that a day of reckoning is approaching.

Given the interconnectedness of the European Monetary Union, any major hiccup in Italy would have severe consequences for the EU and the global financial system more broadly.

Italy is too big to “bail”

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Italy has had structural deficiencies for a long time

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Italy’s economy has struggled since the Global Financial Crisis

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Italy’s government indebtedness appears unsustainable


Italy’s banking system has a non-performing-loan problem

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Regulatory risk-weightings on some banking assets seem inappropriate

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New “bail-in” rules risk a potential run on banks that become distressed

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So why does this matter now?

We highlight the Italian financial system as an increasingly concerning risk that we are monitoring closely. We cannot predict if a crisis is imminent, though recognize the large impact it would likely have on EU economies and financial markets globally.


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Andrew Macken is a Portfolio Manager with Montgomery Global Investment Management. To learn more about Montaka, please call +612 7202 0100.


[1] The Bank Recovery and Resolution Directive (BRRD) establishes a common approach within the European Union (EU) to the recovery and resolution of banks and investment firms.

[2] TARGET stands for Trans-European Automated Real-time Gross Settlement Express Transfer System

3 Responses

  1. Hi Andrew, that’s a good, but somewhat worrying analysis. If you were in charge of EU finances, what policies would you introduce to make the situation better and sustainable?


    1. Hi Mike,
      Apologies for the delays in getting back to you.
      Unfortunately, there is no easy way out. Crudely speaking the choice is between: (i) a write-down of government debt which would wipe out the equity of most European banks and insurance companies but would then allow governments to start investing in their economies again, returning the Eurozone to growth and higher employment; or (ii) sluggish or no growth for decades to come.
      Thus far, policymakers have opted for the latter. The former option would be a quicker fix but would be more painful in the short term.

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