Financial Advisor

You have successfully registered with Allianz Global Investors

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Proin elementum aliquam cursus. Suspendisse sagittis orci in euismod facilisis.
Vivamus maximus malesuada quam sit amet consequat.

Financial Advisors

LinkedIn Registration

In order to complete your registration with our system, we need to collect your corporate email address. This address will be used for all email communications from our system to you.

Please update the values shown below if it is not your corporate email address.

How Will Brexit Affect the UK and EU?

Neil Dwane | 07/07/2016
How Brexit Will Affect

Summary

When will Brexit actually happen? Could other countries also vote to leave the EU? And where is the pound headed? Our Global Strategist answers these and other pressing questions about Britain’s new relationship with the European Union.

Key takeaways
  • Post-Brexit vote, the UK may be in a better position than the EU, at least until Article 50 is triggered. Exit negotiations could hurt UK consumption, hiring and investment, potentially causing a UK recession. 
  • Brexit will play a role in Europe’s upcoming elections, especially in Italy and France. If unease spreads, EU economic growth could be stalled by delayed corporate investment and the fragile state of euro-zone banks. 
  • If the UK imposes migration constraints, it may be unable to maintain its EU trade relationship. Perhaps the British Government can successfully define the difference between the free movement of labour vs. people. 
  • While the British pound has been more robust than expected after its initial fall, it may be undermined by the UK’s budget deficit, high levels of indebtedness and persistent trade deficits. 
  • Oil and food prices will be major drivers of UK inflation over the coming years, as will potential trade tariff changes.

As investors begin to navigate what the UK and EU will look like in the new post-Brexit world, it may be helpful to think in terms of the famous Donald Rumsfeld quote about “known knowns”, “known unknowns” and “unknown unknowns”. Clearly, the UK and the EU have started a “journey into the unknown” with a timeframe that, for now, is similarly “unknown”. Yet what is known is that some of the post-referendum pain has already been felt, and that the UK may be in a better position than the EU – at least until terms of the UK’s actual exit from Europe are defined. Nevertheless, growth will be lower, sentiment across Europe will be more fragile and politically sensitive, and the need for investors to find sufficient returns remains extremely pressing.

Known knowns

What has changed and when will Brexit happen? 

The UK will be part of the EU for most likely another two and a half years – at least. As such, EU laws and responsibilities should remain unchanged until negotiations have been completed, probably in late 2018 or early 2019. Scotland and Northern Ireland remain very much part of the UK and, despite having voted against Brexit, there is no appetite nor essential mechanism whereby they can force the British Government to allow them their own independence referendum. Indeed, for reference, Scotland rejected its 2014 independence vote with a strong turnout (85 per cent) and a majority voting to stay (55 per cent); in the 2016 Brexit referendum, turnout was 67 per cent and 60 per cent were in favour of remaining.

EU laws and responsibilities should remain unchanged until negotiations have been completed, probably in late 2018

Is there any chance of another UK referendum on EU membership?
Despite a very large online petition essentially calling for a “do-over”, it is unlikely that another referendum will occur; the British Government has already said that this referendum result is final and that it will comply with the voters’ wishes.

Will the changes to Britain’s Conservative government lead to another UK General Election?
This is unlikely, since the UK now operates fixed-term Parliaments and the Conservative Party manifesto for the last General Election, held in May 2015, carried a pledge to have the UK “in/out” referendum; as a result, even if, following the resignation of David Cameron, a new Prime Minister is needed, another election won’t be. However, there may be a referendum or General Election on the terms of the exit deal agreed to with the EU; this might occur in 2019, just ahead of the next scheduled election in 2020.

When will Article 50 be invoked?
The exercising of Article 50, which starts the negotiation process to leave the EU, is the British Government’s prerogative alone; after that, the UK will have up to two years to negotiate the terms of its departure. As a result, it is very clear that no one can force the British Government to make this decision before it is ready to do so. Then again, Article 50 also enters into “unknown” territory here: It is legally unclear whether the Prime Minister can invoke Article 50 or whether the process requires an act of Parliament, and it is also “unknown” if Article 50 can be revoked after negotiations begin; this will weigh on the Government’s thinking and timing.

Article 50 will place more negotiating pressure on the UK once it is triggered

But Article 50 will certainly place more negotiating pressure on the UK once it is triggered, because if an agreement is not reached within two years, the UK will essentially exit the EU without any trade agreement or access to the single market. Knowing the complexity of this negotiation and the potential for a stand-off, it would seem prudent for the British Government to take its time before triggering Article 50 and entering into an exhaustive process with the EU.

It should also be noted that the UK has delegated trade negotiations to the EU since 1975 – and, according to some sources, the UK actually has only two international trade negotiators, where 400 will be required.

What is the EU’s position?
As expected, the EU is taking a firm stance on the UK’s referendum result: Communiqués have stated that the UK should invoke Article 50 as soon as possible and that the EU will not engage in any pre-negotiation until that point.

While it is certainly in the EU’s interest not to make leaving the EU an easy process for the UK, its member states have an interest in reaching a solution that is mutually beneficial. Indeed, the language from Angela Merkel, the German Chancellor, has been far more conciliatory and patient in tone and message.

For now, it seems likely that the EU can either press on for "more Europe as detailed in the Five Presidents Report – hastening closer fiscal, monetary and political union – or it can muddle through while waiting to determine both the direction of Europe and the Brexit deal.

The EU will not allow one of its principle tenets – namely “the free movement of people” – to be reinterpreted by the UK

As of now, it seems impossible for the UK to keep its existing EU trade relationship if, as seems likely, the UK imposes constraints on the migration of EU citizens. While immigration has become a leading factor in the growth of nationalism across Europe, exacerbated by recent terror attacks in Belgium and France, the EU will not allow one of its principle tenets – namely “the free movement of people” – to be reinterpreted by the UK.

How will Brexit affect upcoming European elections and national politics?
Europe has many important election dates coming in the next 18 months, and with Brexit reverberating within the EU and within individual countries, the tone and tenor of discussions may change.

  • Spain’s 26 June elections went well from an EU perspective; the anti-EU protest vote did not gather more momentum, which could allow the EU to conclude that they should stay the current policy course.
  • In October, Italy will hold an important constitutional reform referendum, which may well turn into a de facto vote on the Renzi government itself and on membership in the EU – particularly with the very anti-EU Five Star Party becoming more popular.
  • In March 2017, the Netherlands elections will come essentially on the heels of another refusal to approve trade relationships with the Ukraine. The French will vote in April/May; many hope for a mainstream candidate to be elected, but anti-EU sentiment is making a strong showing. And, of course, Germany itself will hold important elections in the autumn.

Elections in Italy and France have the biggest potential to transform the political narrative in Europe

Of all these political events, it is Italy and, remarkably, France that have the biggest potential to transform the political narrative in Europe.

Known unknows

Where is the British pound sterling headed?
Sterling – which priced in a tremendous amount of volatility and hedging before the Brexit referendum, and which suffered from a dramatic overnight fall as the result unfolded – has been more robust than expected and has not traded much out of the range seen earlier this year. However, when Article 50 is enacted, Sterling may be undermined by government budget deficits (approximately 6 per cent of gross domestic product), by high levels of government and consumer indebtedness, and by persistent trade deficits. Still, the timing of Article 50’s invocation is uncertain. Fundamentally, Sterling should be expected to work lower, but how much lower depends on politics and policies; USD/euro parity is also possible. Juxtaposed against this fragility is the intense allure of UK and London assets to overseas investors who value legal certainty and exceptional property rights as much as they value returns.

What are the economic growth prospects for the UK?

The period of exit negotiations will affect UK consumption, hiring and investment; this could cause a recession in 2016 or 2017

The Brexit decision will, if it hasn’t already, cost the UK some of its recent reasonable economic momentum. The period of exit negotiations will affect domestic consumption, corporate investment and hiring, and international inward investment – all of which will reduce the UK’s economic growth rate and could cause a recession later in 2016 or 2017.

The UK Government, despite much protest from the Chancellor of the Exchequer, George Osborne, has not been managing its finances in an austere fashion. The markets could force the UK to reduce its deficit by raising taxes, lowering spending or both; this pressure can already be felt with the recent downgrade of the UK’s credit rating by Standard & Poor’s, and with Moody’s to a negative credit-rating outlook. However, in the short term, the Bank of England would be ready to support economic activity with more quantitative easing.

With uncertainty to remain until at least 2018, the UK may well experience something of an investment recession as UK and international companies postpone capital and employment decisions until the terms of trade become clear. It would prudent to expect that UK consumption would also slow or even fall during this period as higher levels of inflation reduce discretionary purchases.

Will inflation hit the UK?

The prospects for inflation in the UK will be watched very closely, especially with a weaker pound feeding domestic inflation because the UK economy imports 60 per cent of what it consumes. Just look at history as a guide: During the Global Financial Crisis, the pound fell 25 per cent and, later, inflation rose to 5 per cent. Clearly, oil and food prices will be major drivers of UK inflation over the coming years, as will potential trade tariff changes. It’s important to note that rising inflation, while essential to our financial repression thesis, will erode the purchasing power of investors’ wealth and compromise the Bank of England’s monetary policy.

Oil and food prices will be major drivers of UK inflation over the coming years, as will potential trade tariff changes

Will the UK experience stagflation?
Some fear that over the next few years, the UK may see little or negative growth while experiencing inflation of 4-5 per cent from Sterling weakness. This would affect domestic assets, including corporate earnings, and it would challenge the environment of very low bond yields, especially because rising inflation could cause the Bank of England to raise rates, which would worsen the economy through the feedback loops of extensive leverage and floating rate mortgages.

What are the economic growth prospects for the EU?

Investors should watch for signs of further contamination of Brexit uncertainty into Europe, such as delayed or deferred investment spending.

The ECB has already forecast that Brexit would lower economic growth by 0.3 to 0.5 per cent per annum over the next three years; the current growth forecast is 1.6 to 1.7 per cent. The decline would happen mostly through falling trade, which would affect Germany, France, Italy and Ireland. Additionally, investors may want to watch for signs of further contamination of Brexit uncertainty into Europe, as seen by investors or corporations delaying or deferring investment spending there. This, combined with the still apparent fragility of the euro-zone banks, could hinder or stall the EU’s reasonable economic growth to date.

What will happen to the EU’s core tenets?
The EU is built on four key tenets: the free movement of goods, capital, services and people. Any attempt during negotiations to inhibit or control one of these tenets may become a deal-breaker.

Investors must navigate the difference between the “cold” negotiating stance of the EU and the ”warmer” economic self-interests of the EU members themselves.

The free movement of goods – or the “common market” that the UK voted to join in 1975 – will be an important economic filter from an individual country perspective. The UK is a large market for many EU exports: It is Germany’s third-largest market and France and Italy’s fifth-largest. Security will also influence many EU members, as the commitment to and effectiveness of NATO rests mostly in the hands of the US and the UK, and thus the members in central and eastern Europe will not wish to totally alienate the UK. Accordingly, investors must learn to navigate the differences between the “cold” negotiating stance of the EU and its representatives in Brussels and the “warmer” economic self-interests of the EU members themselves. Indeed, the auto sector alone exports approximately 60 billion euros’ worth of cars to the UK each year – a market that would be impossible to replace.

The free movement of capital is very important for both the UK and the EU, albeit through different lenses. The UK has built the world’s leading financial franchise in the City of London, and many EU capitals envy the employment, value creation and tax payments it generates. It seems, at least initially, that the EU and ECB would seek to take back into Europe certain euro-clearing and related services and regulations, reviewing at the same time the “passporting” that allows all banks and insurers globally to be based in London but offer services in the EU. From a UK perspective, the loss of “passporting” would seriously affect the City of London. However, moving operations to a less empathetic and more bureaucratic Europe may also affect the EU, where a Financial Transaction Tax is pending; with other financial centres seeking to woo investors too, London would not necessarily be diminished as a significant “offshore” source of capital for Europe and the world. Global financial centres rely on a delicate but robust infrastructure of talent, legal expertise, information technology and regulations. This will make replacing London a very tall order for the EU in the years ahead.

The free movement of services seems to be a much less problematic arena because so many services are requested and delivered locally. Where there is regional co-ordination in areas like research and development, the UK is involved separately, and thus there would be little complication from a Brexit. Agriculture would be a complex issue for both the UK and EU to address, but strategically the UK supplies itself with only 60 per cent of its food, and thus may voluntarily seek to invest and encourage this industry.

Regardless of how the UK solves the immigration issue, it remains a key concern for all of Europe; nationalist parties in France, Italy and Austria are growing in influence.

The free movement of people – a.k.a., immigration – was clearly the “hot button” topic of the Brexit referendum. Without control over this issue, the British Government will fail to deliver what the referendum sought. At this time, the rhetoric remains bold and clear, but it seems that there can be a difference between the “free movement of labour” (where EU citizens with work or skills can migrate) and the “free movement of people” (where EU citizens can move and arbitrage education, health and welfare systems). Regardless of a resolution in time for the UK, it remains a key political issue for all the member states themselves. Nationalist parties in France, Italy and Austria, to name a few, are growing in influence; as such, this issue must be resolved before an EMU member potentially seeks to leave.

Unknown unknowns

As Donald Rumsfeld himself explained when he uttered this now-famous phrase, it is impossible to know what is essentially unknowable. As a result, this area has been deliberately left blank. The ongoing fallout from Brexit will undoubtedly give rise to new considerations that as of now cannot even be contemplated, so investors would be well-served to remain vigilant and poised to navigate the volatility that is certain to ensue.


Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.
The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.
This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations.
This material is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission (SEC); Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; and Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

Expert-Image

Neil Dwane

linkedIn
Global Strategist
Neil Dwane is a portfolio manager and the Global Strategist with Allianz Global Investors, which he joined in 2001. He coordinates and chairs the Global Policy Committee, which formulates the firm’s house view, leads the firm’s bi-annual Investment Forums and communicates the firm’s investment outlook through articles and press appearances. Neil is a member of AllianzGI’s Equity Investment Management Group. He previously worked at JP Morgan Investment Management as a UK and European specialist portfolio manager; at Fleming Investment Management; and at Kleinwort Benson Investment Management as an analyst and a fund manager. He has a B.A. in classics from Durham University and is a member of the Institute of Chartered Accountants.

Why Italy’s Bank Rings Are Breaking

Neil Dwane | 11/07/2016
Italy Banking Rings

Summary

Our Global Strategist says the crisis in Italy’s banks is caused by a system with many interlocking rings – including banks, voters, politicians and regulators – that pass stress from one to the other. This could have dire consequences for both Italy and Europe.

Key takeaways
  • Italy’s insolvent banks could further undermine Europe, which was already suffering post-Brexit. The circularity of Italy’s banks owning its bonds creates a major fault line.
  • With the ECB’s "bail-in" of these bonds, Prime Minister Renzi feels stuck between angering his electorate and bedevilling Brussels. His reform efforts will be on the line in October’s referendum, with the anti-EU Five Star Movement gaining steam. 
  • The ECB’s transfer mechanisms make Germany a major creditor to weaker peripheral banking systems, like Italy’s. With Austria and Hungary also heading to the polls, the risk is rising of more EMU departures, which could turn these TARGET2 debts into a political issue.
  • Troubled loans now total approximately 20 per cent of Italy’s GDP, but banks and regulators have ignored the problem. Recent efforts to recapitalize the banks are insufficient, and the banks still aren’t performing their basic economic function. 
  • Europe and the ECB are embarrassed by the ECB’s complicity and its poor regulation of this banking industry, both of which are hindering any type of sustainable economic recovery.

Like every other economy, Italy has a series of "Borromean" interlocking rings that link its banking sector to its government, economy and consumers. When one ring moves or becomes stressed, other rings rattle or vibrate, causing the kind of declining investor confidence we've seen hit Italy's banks this year.

Italy's issues could trigger another euro-zone financial crisis that, unlike the Greek or Cyprus crises, cannot be swept under the carpet; Italy is too important to the EU

With these Borromean circles breaking badly in Italy and playing out real-time in the markets, there could be dire consequences for Italy's economy, confidence and financial-system stability. It could also affect Europe, which has been on a long journey toward fiscal and monetary union. The banks' lack of capital solvency – not to mention the country's general policy uncertainty and ongoing political troubles – suggest that Italy could further undermine European regional confidence, which has already been falling since the Brexit vote. This could bring about yet another euro-zone financial crisis that, unlike the previous crises in Greece and Cyprus, cannot be swept under the carpet; Italy is too big and too important to the EU and sovereign-bond markets. As a result, political and banking volatility from Italy will remain elevated through the rest of 2016 – with further important elections looming on the horizon in Holland, France and Germany.

Ring 1: Italy's bank ownership of government debt

Even before the Global Financial Crisis (GFC), Italy's banks were large holders of the country's sovereign bonds. After the 2010-2011 euro-zone crisis, these institutions were further encouraged by the European Central Bank (ECB) to use cheap long-term repos to ride the yield curve and boost their profitability, which they did in spades.

Yet the recurring crisis in Greece – which savaged that country's banks – and the shift of regulatory control to the ECB has now led to a more hostile environment. The ECB wants to break the "doom loops" between the euro-zone banks and their governments – the kind that has been so evident in Greece.

The "doom loops" in Italy and Greece are a global financial repression issue: Governments are actively encouraging their banks to buy their own countries' bonds

At the same time, it is not just Italy and the euro-zone that are exposed to these doom loops; given the ongoing financial repression dynamic, this is a global issue, with governments the world over actively encouraging their banks to own their countries' bonds. In Italy, however, the problem is particularly acute because the government there is already very highly leveraged, with a debt-to-GDP level of approximately 135 per cent. The GFC exposed the post-Lehman fragility of the global banking system, with banks encouraged by local regulators and central banks to take counterparties exclusively within their own borders.

The bottom line: The circularity of Italy's banks owning its bonds – which illustrates a government that is over-extended and, by European Union (EU) law, cannot provide state aid to recapitalize its banks – creates the most obvious fault line for the EU's economy and finances.

Ring 2: Ownership of bank bonds by Italy's savers – and voters

As the crisis in Greece became more acute, Italy's banks saw their nervous depositors moving out of their local accounts to those in Switzerland and Germany. The banks responded by offering very attractive retail bonds that locked in Italian depositors again, thereby reducing the need to access more expensive money market funds. Phew!

Renzi knows it's not politically sensible to follow the ECB's new bail-in regulations as he seeks to recapitalize Italy's insolvent banks

But in 2016, the EU changed the "bail-in" rules for all EU financial companies, penalizing bondholders first, ahead of depositors and taxpayers, when banks need additional capital. The ECB then moved swiftly in January to bail-in Portuguese and Italian banks' retail-held bonds, and this has had serious political repercussions: The depositors are also Italian voters and believe they were misled about the safety of these bonds. The result is that Italy's prime minister, Matteo Renzi, thinks it will not be politically sensible to follow the new bail-in regulations as he seeks to recapitalize the insolvent banks. Yet as discussed in the previous ring, the EU sees direct Italian aid as state aid and considers this proposal illegal, leaving Renzi with the choice of aggravating his electorate or bedevilling Brussels.

The bottom line: With huge amounts of private wealth now invested in Italian bank bonds, Renzi is caught between a rock and a hard place. Moreover, he faces an October referendum on constitutional reform, and the outcome may ride on his solution for Italy's banks. The vote may also be a litmus test on Italy's desire to be an EU member, particularly given that Italy's populist Five Star Movement is riding high in the polls and wants to leave the EU.

Ring 3: TARGET2 participation

The ECB does not work like the US Federal Reserve in terms of balance settlement: In the European Monetary Union (EMU), the ECB's branches do not settle balances each year, although they had never needed to do so before the GFC hit.

Italy does not have the cash to pay for TARGET2 advances, so Germany has become a huge creditor and is not certain it will recover its money

Now, however, there is a huge loan balance, known as the TARGET2 balance, of approximately EUR 650 billion; the stronger central banks in Germany and Luxembourg have loaned it to the weaker peripheral EMU members, and Italy now owes around EUR 250 billion. Because Italy does not have the cash to pay for these advances, Germany has effectively become a huge creditor, and Germany is not certain it will recover its money – which in good times did not matter.

These TARGET2 balances are from time to time a serious political issue – especially in Germany, where they cause a bone of contention between the old Bundesbank and the new ECB. With Germany's growing discomfort over ECB policies, and especially over negative interest rates, the current situation needs only to get a little bit worse for this to snowball again and make new headlines – further undermining confidence in the ECB, the euro and the EU.

The bottom line: Because of the way the ECB works, there is already a huge transfer of credit under the surface of the ECB, moving from Germany to the weaker peripheral banking systems. This could become political if an EMU member threatened to leave, since this transfer currently assumes no credit nor currency-repricing risk.

Ring 4: Italy's constitutional reform referendum in October

Renzi might resign if his proposed reforms are not approved in October, which makes Italy's upcoming referendum yet another high-risk event for the markets

In October, Renzi will seek to renew the decision-making process of the Constitution of Italy so that his proposed reforms can be more easily implemented. These reforms are sensible and, were it not for the intemperate environment in Italy, would be relatively straightforward to approve. The issue is that the Five Star Movement has been doing well in recent local polls and capitalizing on not only on Italy's poor economic situation, but on the growing anti-EU feelings that are being fuelled by the African migrant crisis affecting southern Italy. Renzi has also effectively suggested that he might resign if these reforms are not approved; that makes the October referendum yet another high-risk event for the markets, especially coming on the heels of the Brexit surprise.

With the EU trying to forestall Renzi's recapitalization of Italian banks with state funds, he may now face his own political crisis, which links to previous rings: Do right by the Italians or do right by the EU's rules and regulations. If Renzi loses in October, Italy may hold a general election that could bring about an anti-EU government inclined to leave the euro and EMU.

The bottom line: European political uncertainty is rising: Italy, Austria and Hungary all have elections or referendums in October, which could produce negative EU news or policies. In the UK, on the other hand, the high point in the political cycle has arguably passed now that the Brexit vote is done.

Ring 5: 20 per cent of Italy's GDP is in non-performing loans

As was the case in many banking systems before the GFC, Italy's banks actively lent to corporations and consumers alike; unlike in the US, however, this built large asset books that were not securitized and sold into Italy's markets. As a result, when the GFC and ensuing recessions hit, Italy's banks had insufficient capital to write down their troubled loans and stave off insolvency.

Troubled loans in Italy now total around 20 per cent of Italy's GDP – around EUR 400 billion.

Troubled loans in Italy now total around 20 per cent of Italy's GDP – around EUR 400 billion. Yet for five years, the Italians, aided by the Bank of Italy looking the other way, "extended and pretended" that their loans were good – conveniently ignoring the fact that all bad loans fester and die. During this time, the ECB's lending programs – which were designed by the former chair of the Bank of Italy, Mario Draghi, who now heads the ECB – tried to provide free money to Italy's banks so they could use the profits to write down those bad loans. However, this has taken substantial time, which markets, policy makers and governments do not control; in the meantime, the tide is going out, and only then do you see the quality of the swimming trunks!

As a result, earlier this year, Renzi created a bad bank – the Atlante fund – to help arrest the declines in Italian banks. Unfortunately, unlike the Troubled Asset Relief Program in the US in 2009-2010, which forced all banks to take up equity, the Atlante fund is too little, too late and too reluctantly funded by stronger Italian banks – which would like to see their competition die.

The bottom line: An insolvent banking system cannot perform its basic economic function of creating and lending credit into the economy, and insolvency can only be restored by clearing losses and by injecting adequate equity capital – both of which are hugely dilutive to existing shareholders. As a result, Italy's banks are inhibiting the country's economic growth.

Ring 6: Negligent management, oversight and auditing standards

Bank management teams around the world, driven by their own personal survivor bias, have been in denial about their industry's post-GFC state and future prospects – this despite central banks globally going all-in to save the system in the short term, juxtaposed with much more aggressive regulatory and political regime changes.

At the same time, although Italian banks have seen many management changes, there have been no injections of external new blood to help them rethink the old dysfunctional business model, which is why nothing significant has truly changed. This stasis has been exacerbated by the inadequacy of the auditing profession, which has represented management and regulators, not shareholders.

With many banks still too big to fail, manage, break up or regulate, the world is as vulnerable to crisis as it was eight years ago.

Regulators and central banks also have not wanted to show in public that their charges, the banks, were in dire disarray both before and after the GFC – and this still holds true across the euro zone. Despite this widespread failure, the sector's political influence, monetary clout and economic importance has made many banks too big to fail, manage, break up or regulate. As a result, the world is as vulnerable to another GFC as it was eight years ago. Clearly, more regulation does not work: Banks must be allowed to fail like ordinary companies.

The bottom line: Europe and the ECB are increasingly embarrassed by the complicity of the central bank and its poor regulation of this industry, both of which are hindering any type of sustainable economic recovery.


Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.

This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations.

This material is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission (SEC); Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; and Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

Expert-Image

Neil Dwane

linkedIn
Global Strategist
Neil Dwane is a portfolio manager and the Global Strategist with Allianz Global Investors, which he joined in 2001. He coordinates and chairs the Global Policy Committee, which formulates the firm’s house view, leads the firm’s bi-annual Investment Forums and communicates the firm’s investment outlook through articles and press appearances. Neil is a member of AllianzGI’s Equity Investment Management Group. He previously worked at JP Morgan Investment Management as a UK and European specialist portfolio manager; at Fleming Investment Management; and at Kleinwort Benson Investment Management as an analyst and a fund manager. He has a B.A. in classics from Durham University and is a member of the Institute of Chartered Accountants.
Connect With Us
Stay up-to-date with social media
Contact Allianz Global Investors
For more information on our products and services
Contact Us