Amid a toxic cocktail of low interest rates and stalling economic growth, the full scale of Europe's banking crisis is set to be laid out this evening. Investors are nervously awaiting for the results of the European stress tests, which are designed to show how well prepared firms are for market shocks or downturns. Italian and German bank balance sheets are drawing the biggest concerns ahead of the results, which are to be released after markets close at 9pm British time.
A late minute rescue deal has been tabled for Italy’s Monte dei Paschi di Siena (MPS), the world’s oldest bank, as investors and pensioners brace for the result of the assessment of its economic health. Italy's lenders hold around £270billion of non-performing loans (NPLs) - a third of the eurozone's total. The problem has grown following Britain's vote to leave the European Union (EU) because of the hit to the eurozone economy.
Investors are particularly worried about the future of Italy's Monte Dei Paschi di Siena (MPS), which is set to be highlighted as one of the weakest banks in Europe by the stress tests. The lender has has a market value of less than £1billion - but holds around £40bn of bad loans on its books. Ahead of the stress tests, MPS has been desperately trying to secure a £4.2bn (€5bn) cash injection from investors in an effort to persuade markets it is stable. Michael Hewson, chief analyst at CMC Markets, said: "Given Monte Dei Paschi di Siena has already seen €15bn in bailout funds disappear up in smoke in the last eight years it would be a brave, or foolish investor who puts money in this particular black hole."
The International Monetary Fund (IMF) has also highlighted the Italian loan crisis as one of the biggest risks to Europe's economy. Earlier this month chief of the European Central Bank (ECB) Mario Draghi called on politicians to find a solution to the problems. However, Italy’s prime minister Matteo Renzi is fighting German chancellor Angela Merkel and Brussels over how to deal with the problem.
New EU rules mean small investors must take a hit before the government funds are used to rescue banks.
This would mean a huge hit for Italian savers and almost certainly see Renzi lose a constitutional referendum coming later this year. The leader has promised to resign if he loses the vote over plans to axe the Italian senate. Alastair Winter, chief economist at investment firm Daniel Stewart, said: "Italy’s long-term economic performance is dismal as shown and the Bank of Italy has just revised its GDP forecasts down to one per cent for this year and next. "Every time I visit there are more signs of people spending less and worrying more about the future. "On a humanitarian level the Italians have been amazingly generous to immigrants arriving from Africa and Asia and feel the rest of Europe owes them."
Investors will also be looking at how German banks fare in the stress tests, particularly Deutsche Bank.
Earlier this week the German lender revealed second quarter net income had dived by a massive 98 per cent to around £16million (€20m) from from £668m (€796m) in the same period last year. It comes after fears escalated this year Deutsche would not be able to pay its debts and remain profitable, amid regulator fines for previous wrongdoing. A huge investor sell-off on the bank in February forced chief executive Jon Cryan to try to calm investors. He insisted the company's balance sheet was "absolutely rock solid" and added: "The market also expressed some concern about the adequacy of our legal provisions but I don't share that concern. "We will almost certainly have to add to our legal provisions this year but this is already accounted for in our financial plan," he added.
