Monday, February 24, 2014

A new euro zone crisis in the making? The Bank of Italy's omen on stress testing

Today, the Bank of Italy proposed a bad bank for non-performing loans for the banks it supervises. The government is denying that there is a need for such a bank, that would have to have state guarantees for the loans the bank holds.

On November 4th of this year, the ECB is supposed to take over supervision for the EU's 128 largest banks. Before that happens, the ECB will undertake stress tests and identify amongst other things, non-performing loans that need to be cleaned up.

If the Bank of Italy's proposals were taken on board by the government, it would be a sign of economic responsibility in Italy to cleaning up its banking sector, but the political mentality appears to be twofold in Italy--that the state couldn't pay if it wanted to, and therefore that what you don't know won't kill you. But it will, and that will unleash a new crisis in the euro zone as the markets guess the level of the damage.