The next EU crisis; Italy's banking system

Just as the heightened fear and uncertainty reached frightening levels after the British referendum to exit the EU, it appears the event has indirectly influenced a trigger of a fresh crisis concerning Italian banks. Although Italy's banking system has been under strain for some time, the markets shifted focus away from a potentially devastating financial implosion has made the likelihood of such occurrence edge closer to happening.

And if you thought the European circus of politics couldn't entertain you anymore than it has, a regulation passed by the European Commission preventing member governments from bailing out ailing banking institutions is going to have dire consequences on the strength of the union if it cannot be overlooked.

Effectively the EU wants creditors to suffer from losses made by the banking institution, a term referred to as bailing in, instead of allowing governments to mop up the mess. If the EU were to succeed in upholding such policy it could mean funders aiding the banks with credit to generate loans would now be less convinced to provide financing facilities as well as cause a collapse of the entire Italian banking system if continued signs of financial stability erosion isn't plugged.

It should be said that a figure of 17% has been bantered around as a measure of the amount of loans that are considered "soured" or "bad", meaning an unlikeliness of being recovered which equates to roughly €360 billion in loans that cannot be paid!!!

Moving on to the economic dynamics that would lessen the severity of a mass default, lack of any confidence can be found when considering that the Italian economy has grown underneath the 1% band for far too long to shine any hope on the matter. Some analysts have cited the inadequate depreciation in the Euro versus other major currencies has made Italian goods & services more expensive when compared to its counterparts giving impetus to calls from nationalist parties for an exit out of the EU agreement.

Bad-debt warning triggers fresh fears for Italian banks https://t.co/rxW2sPduwD

— CNBC International (@CNBCi) July 5, 2016

That reality became much more real after the British referendum which not only put the final nail in the coffin of Euro optimists but also feted the grievances among citizens of Europe. Inasmuch as politicians in the region might find diplomatic and flexible solutions to devilishly avoid evidence proving closer integration a mass failure, the full effects being felt by the ordinary folk on the street has become so insurmountable that its caused a revolution of opinion.

What was once seen as beneficial is now seen as thieving sovereignty if agreeing to generalised policy that might stand in one country but has no place in another.

Italian prime minister Matteo Renzi will have to decide whether he should followed the prescribed rules set out by the EU commision or ignore them and face the consequences of the trade bloc but inevitably save his nation's banking system from collapse.

The EU's lack of flexibility over this simply enforces the notion of drawing out extreme cases where convention is disregarded and rules firmly stated instead of dealing with the issue at hand. This only serves to weaken the EU and strengthen the case of Euro-Skeptics who are convinced that this will all come crashing down.

Italy can't succeed economically if their banking system is placed in such a poor state that it drawdowns confidence in them.