If you think Britain’s banks are in bad shape, spare a thought for the Italians, where the country’s battered lenders are rapidly crumbling under an astonishing €360bn (£300bn) of bad loans.
While most people fret about the fallout from Brexit, some experts believe Italy’s banking crisis represents a far greater threat to the eurozone.
The problem is that Italy’s financial system needs a substantial bailout, but EU “bail-in” laws prevent prime minister Matteo Renzi from undertaking one without first wiping out the banks’ shareholders and bondholders.
Renzi, however, is desperate to avoid this because it could cost him his political career. In Italy, tens of thousands of households and individuals have bought such bonds, and forcing the problems of the banks on the man on the street would make it impossible for Renzi to be re-elected.
He argues that the rules, introduced after the financial crisis, should be waived because the market turmoil unleashed by Brexit has threatened Italy’s financial stability.
However, Brussels is refusing to budge, and senior banking sources believe Renzi could press ahead with a €40bn bailout.
Such a move would be the equivalent of throwing a hand grenade at the entire EU project. By flouting state aid rules, it throws into question the future of the banking union, a central pillar of the eurozone.
Also, by setting a precedent for bank bailouts, it paves the way for countries such as Portugal, where the financial system is also under strain, to suddenly do the same, therefore undermining the EU’s entire credibility. Forget the Greek crisis – this is Europe’s biggest test yet.
Trident peril for Rolls
Tomorrow, Parliament will vote on whether to renew the controversial Trident nuclear weapons system.
The UK’s ageing Vanguard submarines are set to be replaced by four new nuclear subs under the Successor programme.
It is a huge politicial issue, and Labour is seriously split on it – Jeremy Corbyn is against maintaining the nuclear deterrent, while most of his party is in favour.
It is also an important moment for two of the UK’s biggest companies – Rolls-Royce and BAE Systems, which have been given the task of leading the Successor programme. The project is one of the most prestigious UK defence contracts in history, and, with an anticipated cost of more than £40bn, the biggest government spending programme in existence.
Yet before the project has even got off the ground, their involvement is under question. As we report today, the Government is growing increasingly nervous about the ability of both Rolls and BAE to deliver on time and within budget, and as a result is weighing measures to ensure Successor remains on track.
They include bringing on board another partner, possibly one of the big American contractors, to oversee the work, akin to hiring a babysitter for two of the UK’s biggest defence contractors.
While such a move would be humiliating for both, it would be particularly damaging for Rolls, which is trying to bounce back from a string of mishaps.
New boss Warren East has steadied the ship but any problems on Successor would be a major setback.