2016-06-28telegraph.co.uk

Italy is preparing a €40bn rescue of its financial system as bank shares collapse on the Milan bourse and the powerful after-shocks of Brexit shake European markets. An Italian government task force is watching events hour by hour, pledging all steps necessary to ensure the stability of the banks. "Italy will do everything necessary to reassure people," said premier Matteo Renzi. "This is the moment of truth we have all been waiting for a long time. We just didn't know it would be Brexit that set the elephant loose," said a top Italian banker.

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Italy's banks are the Achilles Heel of the eurozone financial system. Non-performing loans have ratcheted up to 18pc of total balance sheets as a result the country's slide into depression after the Lehman crisis.

The new bail-in reform this year has brought matters to a head, catching EU authorities off guard. It was intended to protect taxpayers by ensuring that creditors suffer major losses first if a bank gets into trouble, but was badly designed and has led to a flight from bank shares. The Bank of Italy has called for a complete overhaul of the bail-in rules.

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Italy is now paralyzed under the existing eurozone structure. Analysts say it desperately needs a US-style bank rescue along the lines of the ‘TARP' in 2008, which used federal funds to mop up bad assets and stabilize the banks. This is forbidden by the eurozone.

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Hedge fund veteran George Soros warned that Italy faces the risk of a "full-blown banking crisis" that could bring the rebel Five Star Movement to power as early as next year. The banking squeeze has become politically explosive in Italy after thousands of small depositors were wiped out at four regional banks late last year...

Mr Renzi may be forced to take matters into his own hands and enact a unilateral sovereign rescue of the Italian banking system in defiance of the EU, unless he wins concessions soon from Brussels. Those who know him say he will not go down in flames for the sake of European ideological purity.



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