Categories: Base Metals / General Market Commentary / Precious Metals
Topics: General Base Metals / General Market Commentary / General Precious Metals

Italy's Banking Crisis Is Nearly Upon Us

Italy's Banking Crisis Is Nearly Upon Us

written by John Mauldin

There is a high degree of probability (approaching 90%, I’d say) that Italy will experience a severe banking crisis in the next few quarters. Perhaps they can stave off the problem for a year, but something will have to be done about the banks.

Italian GDP per person lagging the rest of Europe

Italian citizens haven’t had much fun the past decade, judging from their GDP. You can see on the left side of the chart below that GDP per person has lagged the EU since 1995. Worse, it kept falling after 2009, even as Italy’s neighbors recovered.

This performance stands in stark contrast to Italy’s pre-euro experience. Even though Italy constantly revalued the lira, that revaluation process allowed Italy to grow its GDP in real terms as fast as Germany did for decades. Notice in the graph above that the real drop off in Italian economic performance began shortly after the introduction of the euro in 1999.

Italy was one of the economic miracles of the 1960s and 1970s. The northern part of Italy was a production powerhouse. The region was strong in the design and manufacturing of all manner of products across a whole host of industries. Even banking was strong.

You need to know that Italy is the eighth-largest economy in the world and has issued the third-largest amount of sovereign bonds. And that mountain of sovereign bonds is really the avalanche-in-waiting that an Italian banking crisis will send tumbling down on the rest of the world, because a large percentage of those bonds are outside of Italy—sitting on the books of banks and central banks.

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