In the aftermath of UK’s Brexit vote, the focus of attention has switched to Italy’s banking sector, which has accumulated €360 billion in bad loans, and growing.
A former member of the ECB executive board Lorenzo Bini Smaghi, and now chairman at Societe Generale, has warned the banking crisis in Italy could spread to the entire EU.
“Europe is extremely sick and must start dealing with its problems extremely quickly, or else there may be an accident. I’m no doomsday prophet, I am a realist,” he said in an interview to Welt am Sonntag.
According to Folkerts-Landau, Brussels should follow Washington’s steps that helped US banks with a $475 billion bailout.
“In Europe, the bailout does not need to be so large. A €150 billion program should be enough to help European banks recapitalize,” he said.
The decline in bank stocks is only the symptom of a much larger problem, which is low growth, high debt and dangerous deflation, Folkerts-Landau added.
Over the last 12 months, Deutsche Bank shares have plummeted 48 percent. Another major European bank, Credit Suisse is down 63 percent since July 31 last year. All in all, the Bloomberg Europe 500 Banks and Financial Services Index has nosedived 33 percent in 2015 to the lowest level in more than seven years as of last Thursday.
However, the economist said a new global crisis is less probable, as the banks have grown more stable and have more equity. Despite this, they face “a slow, long downward spiral.”