The high amount of non-performing loans in Italy makes the banking system particularly vulnerable to any further deterioration in the economy.
On the eve of Donald Trump’s inauguration, examining the most controversial measure - the introduction of a plan toadjust taxes at the border(border tax proposal)- is necessary. It involves introducing a form of VAT in the United States on traded goods but not on wages.The economic and financial consequences of such a measure go well beyond the confines of US taxation alone.
In theory, this type of measure is neutral for trade, because it is supposed to trigger an appreciation of the dollar,which would neutralise the initial trade advantage (generated by taxing imports and subsidising exports). However, the fact that wages would be deductible changes the situation completely from a legal standpoint and goes against WTO regulations, which could potentially open the door to retaliation from trading partners.
Whatever happens, this type of measure is likely to be a source of confusion. In light of the uncertainty over its impacts (on the US economy, emerging markets and the dollar), investors’ jitters would be very much apparent, at least initially.
As such, the ECB has required the most fragile Italian banks to sell off surplus nonperforming loans. The market value of the non-performing loans is lower than their book value. Certain banks have attempted to raise capital from private investors in order to finance these sales, unsuccessfully in the case of Monte dei Paschi. In accordance with European regulations, holders of Monte dei Paschi’s subordinated, or even senior, debt, which in many cases are Italian households, should have contributed to the bank’s recapitalisation and borne some of the losses. This would have led to a deposit flight in the country, further weakening the banking system. The authorities were nonetheless able to invoke Article 32 of the BRRD in order to recapitalise Monte dei Paschi and avoid Italian households having to suffer losses, with the support of the Italian government.