Upcoming health check on European Banks expected to highlight Italian plight

James Nickerson
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Analysts think Italian banks could have €360bn in near-worthless debt (Source: Getty)

The Italian financial system's plight will be highlighted this week as a heath check of Europe's biggest banks will lay bare the extent of its troubles.

Monte dei Paschi di Siena, Italy's third-largest lender, is expected to be among the worst performers in the stress test, and will add pressure on the European Commission to make moves to solve the situation.

Italian Prime Minister Matteo Renzi and the European Commission have been trying to solve the problem in recent weeks, at times almost coming to blows over the situation.

Read more: European banking shares bounce on Draghi bailout chatter

Markets and the European Central Bank wants Italian banks to unload high levels of sourced credit, but Renzi is in talks with the commission to allow the state to help in order to protect savers from losses.

Renzi wants to use taxpayers' cash to help alleviate concerns, but other nations object to state bailouts unless losses are also shared with private creditors.

Analysts think Italian banks could have €360bn in near-worthless debt - or "non-performing loans" (NPLs) - equivalent to around fifteen per cent of their total balance sheets.

A factor holding back the sell of these NPLs is that the banks are prepared to sell at near 50 per cent of the original value for loans backed by property, while investors are prepared to pay around 20 per cent for such credit, according to Reuters.

Read more: Italy's banks won't destroy the Eurozone - in the short term

A package being considered by the EU, which could include money from the public purse as well as the private sector, could inject up to €40bn into the Italian banking sector.

The health of Italian banks has been exacerbated by the Brexit vote, while low and negative interest rates have made it harder for them to boost profits.

Last week European Central Bank president Mario Draghi raised the prospect of a “public backstop” to help support banks in “exceptional circumstances”.

The ECB wants Monte dei Paschi di Siena to rid itself of €14bn of bad loans in the next two years.