There is much truth in the saying that if you owe the bank ten thousand Dollars, you are in trouble: if you owe the bank ten million dollars then the bank is in trouble. Bad debt is money owed to the bank that it has little prospect of being repaid in full for, largely because the underlying assets have declined in value which was the case in the Spanish and Irish banking crises when speculative property bubbles burst, leaving the banks with significant bad debt.
The Italian banking system is exposed to about one third of all bad debt in the Eurozone with €350 billion on its books – this is about one fifth of the value of all loans held by Italian banks; otherwise stated 80% of Italian bank loans are performing.
The Italian government is bailing out two Venetian banks to the tune of €5.2 billion. The ECB warned that Banca Popolare di Vicenza and Vento Banca risked failing just last week. The banks together with their performing assets will be taken over by Intesa Sanpaolo banking group for the nominal sum of 1€ each with the state aid used to cover bad debt. The move is intended to protect savers’ assets, assure the good health of the Italian banking sector and avoid any risk of a run on the banks. The failure of the two banks puts 4000 jobs at risk.
The measures taken by the Italian authorities fall short of a banking sector bailout which would entail consequences at the Eurozone level, leaving the Italian authorities greater latitude of action.