Portugal Gaining On Italy In The European Banking “Doom Loop”

Italian banks have taken a pounding of late from the ECB, the markets, and the media. They currently hold a whopping 360 billion in nonperforming loans (18 percent of their portfolio), the most in the European Union and double that of the next worst performer – Spain.
As shown in the graphic above, Italy is also the worst performer among major EU nations along another metric of banking-sector fragility – the dreaded ‘doom loop’ of indebted banks and sovereigns.
A doom loop is set in motion when banks load up on debt issued by their government, and the government in turn guarantees, explicitly or implicitly, the debt of the banks. As banks’ balance sheets weaken with rising bad loans, this impairs the fiscal position of the government backstopping their debt. And as the government’s fiscal position deteriorates the loss exposure of the banks holding its debt rises. Thus do weak banks drag down weak sovereigns, which in turn further weighs on the banks – ad infinitum.

This post was published at Zero Hedge on Aug 15, 2016.