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August 12, 2011

Italian emergency budget could trigger run on Italian banks

Today the Italian Finance Minister has informed the Parliament of the measures he is going to enact to stabilize the budget.
The proposals were foggy enough to allow for last minute fixing should the political or public rage get out of control.
Aside from all the other proposals which are grave enough and risk enacting the same downward spiral we have witnessed in Greece, the most scary and controversial one was the famigerate "patrimoniale" which is a flat tax on all bank accounts and share earnings that is collected by the Italian government directly from the accounts of every bank operating in Italy.
It was expected that due to high savings rates among the Italian population the first piggy bank to be broken if needed would have been private savings accounts.
This is now coming true and the draft is proposing to tax every income above 90.000 euro with a flat tax of 5-10 percent of the total amount of assets, details are not clear yet and in typical Italian style susceptible to change till the last minute, but it is clear that this proposal could trigger a run on Italian banks in the following weeks.
To enact this kind of law would clearly send a message of  desperation, since they would be using a tax that is guaranteed to accelerate cash bleeding of Italian banks.
Those who have savings will do their best to bring them out of the country and those who were planning to invest in Italy will cheerfully stay away.
No other European country has considered regardless of the severity of the crisis this tax for a simple reason, it ignites a cascading  run on banks and a disastrous outflow of capitals!
The last time it was enacted in Italy was before the Euro and was used once only as a special Euro Tax to raise capitals in order to satisfy requirements for entry into the Euro. Lira was then still the Italian currency and movements of capitals were monitored and restricted.
This time though it is a different story within a single common currency there are no restrictions to movements of capitals within the Eurozone and at large within the EU, thus allowing anyone unwilling to be taxed 10% of their capital to open a bank account anywhere else in the Eurozone and escape taxation.
Greece experienced the same dilemma when a simple lack of confidence in Greek banks caused massive outflows of private capitals from Greece to Cyprus and England.
Should they go forward with this plan be prepared to see capitalization of Italian banks to dry up with massive outflows to safer havens.

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