By Stratfor Analysts at MarketWatch
Italy’s banking crisis has long been brewing, and the markets appear to be taking it seriously for the first time since European Central Bank President Mario Draghi defused the last market panic by promising to do “whatever it takes to save the euro” in mid-2012.
Either way, the market sell-off could seriously damage Italy’s economy. New regulations brought in at the start of the year heighten the risk of a bank run because investors and depositors must now bear the pain of an Italian bank going bust. This is a strong incentive for a bank’s depositors and investors to move their funds elsewhere if they believe the bank is in danger (sentiment plays a role again), and there are reports that Monte dei Paschi depositors are doing just that.
Italy and the European institutions must now look for ways to reverse the sentiment that is making Italian banks the victims and reassure the markets of the banks’ safety. The drastic way of achieving this would be a government bailout, but this is unlikely both because of the new rules and because bailouts typically occur when a crisis is in a more developed state.
Another way would be persuading another Italian bank to buy Monte dei Paschi and take on its risky assets at a discount, thereby reassuring the market that Italy’s largest problem is now solved. This is possible in theory, though the travails of banks that bought their weaker peers in the crisis of 2008 might make it a hard sell for potential suitors.
The final possibility, which is more of a hope than anything, would be that the global markets’ tricky January will turn out to be just that, and that the world will enter February in the somewhat calmer state of mind in which it ended December. For that to happen, the markets would need some good news and perhaps some soothing words out of those movers and shakers meeting in the rarified airs of the Swiss Alps.
But with the structural changes that are now in place, China’s struggles likely to worsen, oil prices unlikely to rise and a wave of migrants awaiting their cue to enter the Balkans, hope for that kind of improvement is probably misplaced.