How to deal with Italy's banking problems? - BBH

Analysts at Brown Brothers Harriman explained that maybe if it were not for Brexit, the EC would be willing to fight Italy, and take the chance of undermining Renzi and spark a political crisis in the fall.  

Key Quotes:

"The eurozone finance ministers seem to be taking same approach with Spain and Portugal.  These two countries, they judged, did not do enough to try to reach their budget targets last years.  In about three weeks, the EC will decide the how to address the violation.  It could issue a fine of up to 0.2% of GDP and reduce EU aid. However, it seemed clear the finance ministers were more interested in a symbolic statement than meting out punishment.  Spain and Portugal will spend the next ten days pleading for mercy, being contrite and perhaps make some concession.   

At the same time, the Italian banking crisis should not be wasted.  It is another opportunity for Italy to address its bad loan situation.  As of the end of 2015, Monte Paschi had about 47 bln euros in bad loans, and it had reserve coverage for half.   Its market cap is about five bln euros.  And to solve Italy's problem requires agreeing a general approach to the application of the BRRD.  We suspect the EU will lean toward the French approach, especially if next week's court ruling casts doubt on its authority.  Over time, though, and there may be offsetting influences, the French approach may be a factor that raises the cost of capital going forward."