A new week has brought a new round of selling into the stock market. The positive momentum from last weeks massive rally off the 'Brexit' lows is gone. The negative headlines remain and Italy has now re-joined the fray.
Italy Could Spark a European Bank Crisis. Or so we are led to believe. It's becoming clearer every year that the only bank that really matters is the Central Bank, which for Italy is the ECB. Where is the head of the ECB from you ask? Why the fine gentleman was born and raised in Rome, Italy, the Capital of the Country. And now Italy has quickly come to the forefront.
Italian banks are saddled with some almost $400 billion in bad loans. I guess that's what happens when the Central Banks force lenders to lend with banks having to literally pay the price for holding on to their money via negative interest rates. With the ECB buying up corporate bonds as well, starting last Month, the banks have yet another reason to lend money out via loans that will ultimately go sour.
What happens next?
Recall just years ago Italy was faced with a similar crisis.
The issue is much the same. Too much debt and an inability to pay the debt. The irony this time around is that interest rates around the globe are at historic lows. In theory the price of debt has never been cheaper. But debt that can't be paid back isn't a good form of collateral regardless of the current state of interest rates.
This too shall pass.
The Central Banks continue to have a more active role, don't expect that to change any time soon.
The stock market is percentage points from new record highs, while Bonds are sporting record low yields. That is a rather confusing scenario. If yields start to rise we could see even more debt sour. Those buying bonds at record low yields will incur ever increasing losses if yields ever decide to rise again. They will at some point... right?
But for now easy money via negative interest rates, and Central Banks buying any and all bonds, will keep a lid on the looming Italian banking crisis... because after all only one bank really matters, the Central Bank.... and their unlimited credit card never expires.
But then again......
