While the American mainstream media has forgotten about the minor bump in the global economic road known as the Eurozone, European leaders have struggled to fend off new and more complex threats as the continent's economy continues to derail.
The crisis, which began in May 2010 with the announcement that Greece's government was severely underfunded and required hundreds of billions of dollars in bailouts, is starting to enter the dangerous phase of a full-blown banking crisis. Monte Paschi, known as the world's oldest bank and located in Italy, announced this week that it would suspend payments on a series of so-called hybrid bonds. Doing so calls into doubt assurances from the Italian government that Monte Paschi was well funded and does not require a federal bailout.
Monte Paschi has been plagued by scandals and fiscal doubts since before the Great Recession, when the Italian mega-bank purchased a major rival. Accounting improprieties were investigated but never punished, and there have been accusations of collusion between the Bank of Italy and Monte Paschi during the period when Mario Draghi, now European Central Bank chief, led Italy's own central bank.
The move hinges on certain contractual language that the bank claims gives it authority to freeze the bond's maturity. The hybrids, which were supposed to be paid out later this month, could be the first in a series of actions that gives Monte Paschi more time to solidify its fiscal position. On the other hand, it could be the first indication that there are serious funding issues in the Italian financial system – a criticism regularly levied by economists but rarely reflected in borrowing costs.
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