Italy’s financial winter is coming

“Winter is coming!” It is the motto of House Stark, one of the great houses of Westeros; a fictional world written in a series of books by George R. R. Martin. The meaning behind these words is one of warning and constant vigilance.

Italy's ordeal with the euro is long and complex but the country is potentially another domino that is about to fall and add to the Financial Storm brewing in Europe while BREXIT has yet to take full effect. Many analysts say that this could prove to be equally if not more devastating than the last financial and economic crisis.

A quick overview
* Italy is the eurozone’s third-largest economy, and eighth largest in the world.

* Italy’s banking system has not yet recovered from the 2008 financial crisis and has gone through the whole “global recovery” with no growth.

* Since then, the non-performing loans have swelled to $400+Billion, which is 3 times the bank loans that went bad in 2008.

* The Italian government has almost no (economic) policy ammunition due to anumber of factors:an upcoming referendum on constitutional reform, a deadlock in parliament, anti-establishment sentiments and Euroscepticism.

The best way to describe this is that Italy is caught in between a rock and a hard place, a very difficult situation wherein they have to make a hard decision between two things that are equally unpleasant. Leaving the EU and giving up the euro will potentially destroy the single currency, while returning to their original currency will devalue their money and further complicate the debt dynamics.

Solving this is not as simple as a bail out either since EU rules are designed to shift losses on to investors, bondholders and large depositors first before the taxpayers — called a “Bail-in”. Meaning, someone’s pension or entire life savings and business liquidity will take a hit.

History repeats itself?
* Italian banks face a problem similar to what US banks faced in 2008.They made lots of loans to people who aren’t paying back - but with a bigger amount due to years of weak economic growth.

* One Italian bank has lost 80 percent of its value over the past year, and many worry that some banks could be on the verge of collapse – sounds like Lehman Brothers and other banks to me.

* The “Bail-in” option has already happened in Cyprus back in 2013 wherein pension/savers funds were reduced – now imagine this happening to a much bigger economy.

There was already an incident that occurred in Italy last December 2015 wherein 4 small banks were not bailed-out due to the EU rules which led to one elderly man committing suicide after losing his life’s savings.

I normally don’t pay attention to doom and gloom scenarios but one way or another, this can potentially affect the value of one’s investments whether you’re in the Philippines or somewhere else in the world.

Now, the effect on your investment portfolio will depend on exposure to Europe (in terms of exports, investments, business and the like). If the worse-case scenario happens, the PH economy should be able to mitigate and recover from this financial storm due to our macroeconomic fundamentals.

Have you made your preparations yet?

For a Financial Winter is Coming!

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The writer is an RFP® - registered financial planner of RFP PH, Licensed Real Estate Broker and Director of CERTA, Inc., a family estate planning and investment advisory firm. To know more, please visit www.certa.ph

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Originally Published in Philstar - The Freeman Newspaper last July 19, 2016.