Julius Baer Research | We share the view of Mario Draghi, President of the European Central Bank, that his ultra-accommodative monetary policy stance alone cannot push the eurozone economy out of its current weakness but needs to be complemented with fiscal impulses. As a first small step into this direction, the EU Commission waved the fines for Portugal and Spain for missing the 2015 deficit targets.
According to the Fiscal Compact, the framework agreed to rebuild confidence in the 2012 European debt crisis, both countries would have had to pay fines of up to 0.2% of GDP. It does not make sense in our view to complain about the lack of fiscal impulses on the one hand and to fine the countries that deliver some stimulus on the other. We expect the same pragmatism to rule when it comes to fixing the Italian banking problem.
On paper, the government is only allowed to inject money into banks after holders of equities and subordinated bonds have swallowed massive losses (bail-In). There are rumours that the Italian government will present a privately-sponsored plan to refinance the ailing Banca Monte dei Paschi di Siena (not covered). We can also imagine a solution with some form of state guarantees. (Please note that the European Banking Authority will publish the results of its 2016 stress test on Friday, 29 July, after close of the business.)