ECB Losing Control

Posted by Martin Armstrong - Armstrong Economics

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In Naples, riots against Renzi resulted in clashes between police and demonstrators. On Wednesday, Italy’s government had to address the plight of Italian banks which now seems to be significant as both houses of parliament blessed in a crisis meeting, voted to create a state fund for bad loans from. Resistance to Renzi’s idea was very limited. In Naples there were serious riots against it. In reality, Italy’s government has survived a vote of confidence in this decree involving a bank rescue. The Senate rushed together late on Wednesday afternoon. In the House of Lords, the vote was 171 for the plans, 105 against. This is now all about state guarantees for banks that could collapse under the weight of bad loans and that day is coming rapidly as all the QE efforts of the ECB do nothing to reverse the crisis in banking or the economy. Nonetheless, the House of Representatives had already passed the decree while Prime Minister Matteo Renzi had only a very thin majority in the Senate. The crisis appears to force the measure through demonstrating how bad the banks really are in Italy.

The new plan envisages that banks can bundle their bad loans into new financial products, and then sell them. But who will buy them? On Tuesday it was announced that the government plans to fund the money houses buy the bad loans. The decree also provides for the formation of a holding company to merge the 371 small credit unions. Therefore, it is placing the bad loans outside the banking system. The EU rules for bail-ins are breaking down. Each country is beginning to ignore Brussels and proceed in their own manner demonstrating that the ECB is really losing control.

Meanwhile, the ECB Chief Economist Peter Praet spoke at a conference in Frankfurt on Thursday. Effectively, the message was that the ECB is ready and willing to do “whatever is needed” to return inflation to target. Instead of looking at the current negative interest rate policy, they continue to see the solution to just be more of the same. Obviously, as banks continue to implode in Europe and smart capital flees to the USA, the ECB is incapable to reversing the trend. The cycle will play out and the look very bleak at least into 2018 for Europe.