When it comes to very large numbers, it can be hard to get the right perspective. If you had to count it, a €40bn pile of cash would be somewhat daunting. Place it next to to the Italian national debt, however, and the pile becomes a pimple.
The number matters because it was the amount the government proposed using to assist troubled financial institutions earlier this year. So why may the fate of eight of the country’s banks and — depending on the extent to which 2016 has crushed a person’s sense of optimism — the ultimate fabric of the European project hang on a vote to change Italy’s voting system?
The answer depends how far back and how wide effort to lay blame go. Matteo Renzi has staked his premiership on constitutional reform in part because the existing system has made changing the people in government too easy, but changing Italy too hard.
Or there is the Bank of Italy, which oversees a financial system where bank branches outnumber pizzerias. Too many overstaffed banks means profits are too thin to offset the €360bn pile of bad loans which have been allowed to build up within the system. The banks have been overseen by ranks of directors whose well-paid positions will be at risk when banks are forced to merge and cut costs.
Then there are the unwitting savers who, the International Monetary Fund estimates, have been sold about €200bn of bank bonds. If they were to lose money as part of the resolution of problem institutions under European rules introduced in January, confidence in the banking system will be damaged.
Some might also ponder the absence of American, British, Irish or Portuguese bank executives from jails following a period when institutions variously defrauded investors, blew up, crashed economies, sold millions of worthless insurance or required big government bailouts. Had the response been less technocratic, perhaps the desire to bring in those new bank rules would have been less pressing, populist politics less alluring.
Italy’s underlying problems could be fixed with two elements: economic growth and time. Soured loans at the banks have steadily accrued as businesses and individuals have struggled to repay borrowing, in a system where dealing with those debtors in court has typically taken years. It isn’t that the banks recklessly financed a real estate boom or were drawn into gambling with esoteric securities, but rather a persistent deterioration in the quality of normal business.
Indeed, Italy’s problems are not as severe as those faced in crises which required very large bailouts. In Ireland, for instance, the €64bn cost of its 2010 bailout weighed in at two-fifths of annual Irish economic output and almost three-fifths of existing sovereign debt. Non-performing loans subsequently rose to a quarter of all bank lending at the peak of 2013, according to BCA Research, while in Italy the figure is 18 per cent. In Spain, bad loans at the banks halved after a government supported “bad bank” was created in 2012.
Italian reforms have been made which should help, for instance, by speeding up the workings of Italy’s bankruptcy courts. Before the EU rules came in this year investors had also been supportive, committing €50bn to Italy’s listed banks in the preceding five years, and they seem likely to contribute more in the event Mr Renzi’s administration remains in power.
The immediate issue then is that, through a combination of circumstance and inaction, Italy did not fix its banks before rules came in, which makes it much harder to do so now. It is possible there are ways around these, for instance by invoking exceptional circumstances or finding creative ways to repay retail customers for damaged bonds they were mis-sold. Masking the aid within complex layers of financial engineering in vehicles set up to buy non-performing loans is another possibility.
Yet why resort to subterfuge, if applying the rules too soon is part of a problem which could prove existential for the euro? So why not relax rules? After all a €40bn pile of cash is half what the European Central Bank spends each month in its efforts to support the eurozone, or a third of the value wiped off the Italian stock market this year.