Photo: Photoshop, Chart from Bill Marsh, NYT (Source: Bank for International Settlements)
Two top Italian banking execs recently spoke about how contagion resulting from a Greek default would devastate their industry.First Federico Ghizzoni, the CEO of UniCredit, Italy’s biggest bank, warned that it is important for the 17-nation currency bloc’s leaders to reach a swift decision to resolve the crisis.
If that does not happen, the Head of Global Securities at UniCredit, Attila Szalay-Berzeviczy, warned days later in a fear-invoking op-ed (via ZeroHedge), a “financial apocalypse that arrives as an uninvited guest” will follow a disorderly Greek default. The default wouldn’t just devastate Italy’s banking industry, he warned, but the rest of the world.
The two events are separate, and UniCredit has said that the Head of Global Securities’ views are solely his own, not the firm’s. He signed the op-ed as the former head of the Budapest stock exchange – not an exec with UniCredit.
But the fact is that Italy is one of the next dominos to fall should Greece default, and Italy’s banks are exposed to both risks. And two top execs at an Italy’s biggest bank have warned in the past week that if the matter of Greece’s impending default is not resolved – FAST – disaster lies ahead. It sounds like something we should listen to.
The CEO described the effects on Italy of delaying a Euro crisis resolution like this on Saturday after a cultural event at the Italian embassy, according to Reuters: Sovereign risk stemming from lack of action on the economy could mean a growing spread between Italian bonds and benchmark German Bunds, threatening the Italian economy.
He also said that U.S. banks have pulled out of Europe, and “It’s important to reduce the spread, important to take a rapid decision to reduce the sovereign risk,” he said. (He also said UniCredit is fine right now.)
On Wednesday another exec at UniCredit, Attila Szalay-Berzeviczy, the Head of Global Securities Services at UniCredit Group and the former President of the Budapest Stock Exchange, wrote an op-ed with a more severe warning.
It starts off ringing the death toll on the Euro, which will crash if Greece defaults. Then he describes how infection from Greece will spread through the channel of the banking system to other countries where the “Greek thunderbolt strikes again.” Then banks stop lending to one another, and international markets stop. Panic begins in weaker countries, they withdraw money from banks, but since their deposits are “allocated in the form of inter-bank market… there may be an immediate liquidity crisis.”
(To see a bigger version of the Eurocrisis contagion map above, click here.)
He then attacks the political system in Europe and says that in the U.S., politicians understand that capital markets are efficient economic policy allies of the investor. However “their counterparts in Europe, unfortunately, still do not understand the nature of markets, [and] most of them think that the financial system [is] the ancient enemy because it does not work the way it is dictated by their own political interests.”
One result of the politicians’ error in judgment, he says, is that serious mistakes were made following the financial crisis of 2008, which he says caused politicians to conceal their own negligence and public uprisings by scapegoating the banks.
Banks are necessary to prevent a world-wide liquidity crisis, he says, so this is a huge mistake. Now, we are paying for it in the form of unemployment and diminishing economic growth.
Much worse will happen, he warns, if economic leaders, like Angela Merkel, Nicolas Sarkozy and Jose Manuel Barroso, keep repeating that the Euro will be fine, while implementing no resolution plan.
UniCredit, the biggest Italian bank, is down over 50% this year as investors flee firms that have exposure to the Eurozone’s most troubled countries. After Greece, many suspect that Italy is next to declare default.
The thing to watch for now is the upcoming Italian treasuries auction.
Excerpted sections of what he wrote in an op-ed on a Hungarian web portal (this is roughly translated from Hungarian):
The Euro is doomed.
“As the moment when Greece declares default, Europe can be shaken by an earthquake of magnitude 10, which will bring the onset of an entirely new era in the life of the old Continent.”
This would cause a domino effect. “Channel for the spread of infection, of course, such a scenario would also back the banking system… The international banks in Greece suffered hundreds of billions of euros … other banks will have to do with a country where – according to investors’ expectations – the Greek thunderbolt strike again.”
“And when the banks no longer trust each other, not to lend to each other, the international financial markets stop. This in turn means that all financial institutions left alone with clients. Poor countries with weak banks start to panic, withdrawals of retail funds. But since the retail and corporate deposits and loans are allocated in the form of inter-bank market, these banks can not borrow bridging purposes, may be an immediate liquidity crisis.”
“The American politicians, at least it has always been understood that the money and capital markets are efficient economic policy allies of the investor for the company are responsible for. In contrast, their counterparts in Europe, unfortunately, still do not understand the nature of markets, most of them think that the financial system, the ancient enemy, because it does not work the way it is dictated by their own political interests.”
It was a “mistake and irresponsibility on the part of the political elite of the international crisis in 2009, the easing of its own negligence and error concealment of public passion in order to make a scapegoat of … from financial institutions. When everyone knows exactly that the taxpayers ‘money to government banks are not rescued, but the corporate, retail and municipal depositors’ money.”
“The two reasons people moved their money to the bank: I want to know it is safe and hope the interest on their savings. The bank has to create the security, interests, it must produce. It will only be able to do so, it assigns to the deposits in the form of credit to where money is needed for the operation, growth and job creation. It is sufficient interest to be collected by then to be able to pay interest to depositors.”
Now “regulations, restrictions – which is no small effect on the Hungarian banking capital and liquidity position as well – but the price that banks in lending rates to curb, forced a diminishing impact on economic growth and increase unemployment.“
In Hungary, “the crisis in the banking system, taxes were imposed, a moratorium on the enforcement of mortgages, a three-year rate lock maximizing debtors’ monthly repayments. These measures, of course, painful lives of all financial institutions, but also understandable and tolerable in view of the crisis. The government’s latest idea, a stream of foreign exchange price fixed mortgage repayments, however, is beyond all the existing boundary of sanity.”
He ends with this, summarized by Reuters:
This escalating panic could sweep across Europe in a “self-fulfilling” way, which could lead to the breakup of the euro zone.” Of course, Angela Merkel, Nicolas Sarkozy and Jose Manuel Barroso keep repeating every day that the…euro will stay, as an alternative to that would mean huge costs for each member state,” he said. “But a key characteristics of the breakup of the eurozone will presumably be that it will not be the result of a process managed out of Brussels, but will be the result of a financial apocalypse which arrives as an uninvited guest,” he added.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.