UK and EU Bank Debt
Trouble in the Banks
There is disagreement about Brexit's long-term ramifications on the British economy. However, one thing is certain: Brexit shields the U.K from some of the economic woes of the European Union. The latest threat to come out of the Eurozone is the Italian banking crisis. This crisis may have grave implications for every nation in Europe and perhaps the entire global economy.
In the U.K the banking sector continues to push back against Brexit, increasing the likelihood that the eventual separation will be watered down.
The Italian Banking Crisis Interestingly enough, the Italian economy did quite well in the years before the Euro. The nation's economy was not able to match the efficiency of its northern neighbors; however, by constantly devaluing the lira (its former currency) Italian goods were able to compete. Now, the nation ranks near the bottom of Europe of several important economic metrics.
18 percent of Italian loans are nonperforming; this is significantly more than what would be considered normal or sustainable. It seems unlikely that the banks will be able to rectify this problem without outside assistance because they only have half of the capital needed to cover these debts.
The banks would need a bailout of around 40 billion euros to remain solvent. On top of this, they are faced with numerous lawsuits and have no cash set aside to pay the settlements.
The British Banks
In the United Kingdom, the financial sector sees Brexit as an intolerable disaster and call for a 'Brexit buffer' that would allow them to operate under EU laws for up to five years after leaving the union. In addition, the banks call for the jurisdiction of the European Court of Justice (ECJ) over the transition period.
The banks claim that they need time to move critical operations in the EU, and this five-year buffer would give them adequate time to set up subsidiaries or move operations out of the country. Overall, this push seems to be part of a larger trend to water down the Brexit.
New polls suggest that the majority of people in the U.K would be unwilling to accept a Brexit that harms them financially, and EU negotiators plan to offer British citizens a way to individually opt-in to the union.
The Euro is weak against both the pound and the dollar because of the news out of Italy and the European Central Bank's decision to continue its dovish monetary policy. Deposit rates will be held at negative 0.4 percent, and the refinance rate will be held at 0.0%. Gold prices may see support if the developments in Italy's banking sector get worse. However, losses in the pound and the euro may be defrayed by dollar strength which is usually bad for the metal.