Posts Tagged ‘Italy’

George Soros on European Fiscal & Banking Crisis and EU Summit on June 28-29, 2012

Monday, June 25th, 2012

Here I present key take-aways from George Soros’ in depth Bloomberg interview on the current European fiscal and banking crisis, Angela Merkel, the Spanish bailout, and Greece leaving the Eurozone.

The video is also below:

Banking & Fiscal Issues

  • “There is an interrelated problem of the banking system and the excessive risk premium on sovereign debt – they are Siamese twins, tied together and you have to tackle both.”
  • Soros summarizes the forthcoming Eurozone Summit ‘fiasco’ as fatal if the fiscal disagreements are not resolved in 3 days.
  • There is no union without a transfer.
  • Europe needs banking union.
    • Germany will only succumb if Italy and Spain really push it to the edge (Germany can live in the present situation; the others cannot)
    • Europe needs a fiscal means of strengthening growth through Treasury type entity
      • What is needed is a European fiscal authority that will be composed of the finance ministers, but would be in charge of the various rescue mechanisms, the European Stability Mechanism, and would combine issuing treasury bills.
        • Those treasury bills would yield 1% or less and that would be the relief that those countries need in order to finance their debt.
        • Bill would be sold on a competitive basis.
        • Right now there are something like over €700bn euros are kept on deposit at the European Central Bank earning a 0.25% because the interbank market has broken down, so then you have €700bn of capital that would be very happy to earn 0.75% instead of 0.25%, and the treasury bills by being truly riskless and guaranteed by the entire community, would yield in current conditions less than 1%.
        • Governments should start a European unemployment scheme, paid on a European level instead of national level.
        • Soros’ solutions, however, are unlikely to prove tenable in the short-term as he notes “Merkel has emerged as a strong leader”, but “unfortunately, she has been leading Europe in the wrong direction”.
          • “Euro bonds are not possible because Germany would not consider euro bonds until there is a political union, and it should come at the end of the process not at the beginning.
          • This would be a temporary measure, limited both in time and in size, and thereby it could be authorized according to the German constitution as long as the Bundestag approves it, so it could be legal under the German constitution and under the existing treaties.
          • The political will by Germany to put it into effect and that would create a level playing field so that Italy and Spain could actually refinance debt on reasonable terms.

Scenario Discussion

  • LTRO would be less effective now
  • At 6%, 7% of Italy’s GDP goes towards paying interest, which is completely unsustainable
  • Spain may need a full bailout if summit is not successful
    • Financial markets have the ability to push countries into default
    • Because Spain cannot print money itself
    • Even if we manage to avoid, let’s say an ‘accident’ similar to what you had in 2008 with the bankruptcy of Lehman Brothers, the euro system that would emerge would actually perpetuate the divergence between creditors and debtors and would create a Europe which is very different from open society.
    • It would transform it into a hierarchical system where the division between creditors and debtors would become permanent…It would lead to Germany being in permanent domination.
      • It would become like a German empire, and the periphery would become permanently depressed areas.

On Greece

  • Greece will leave the Eurozone
    • It’s very hard to see how Greece can actually meet the conditions that have been set for Greece, and the Germans are determined not to modify those conditions seriously, so medium term risk
    • Greece leaving the euro zone is now a real expectation, and this is what is necessary to strengthen the rest of the euro zone, since Greece can’t print money
    • By printing money, a country can devalue the currency and people can lose money by buying devalued debt, but there is no danger of default.
      • The fact that the individual members don’t now control the right to print money has created this situation.
      • A European country that could actually default. and that is the risk that the financial markets price into the market and that is why say Italian ten-year bonds yield 6% whereas British 10-year bonds yield only 1.25%.
  • That difference is due to the fact that these countries have surrendered their right to print their own money and they can be pushed into default by speculation in the financial markets.

On Angela Merkel

  • Angela Merkel has been leading Europe in the wrong direction. I think she is acting in good faith and that is what makes the whole situation so tragic and that is a big problem that we have in financial markets generally – she is supporting a false idea, a false ideology, a false interpretation which is reinforced by reality.
  • In other words, Merkel’s method works for a while until it stops working, and that is what is called a financial bubble
    • Financial bubbles look very good while they are being formed and everyone believes in it and then it turns out to be unsustainable…
    • The European Union could turn out to have been a bubble of this kind unless we realize there is this problem and we solve it and the solution is there.
    • I think everybody can see it, all we need to do is act on it, and put on a united front, and I think that if the rest of  Europe is united, I think that Germany will actually recognize it and adjust to it.

On Investing

  • Stay in cash
  • German yields are too low
  • If summit turns out well, purchase industrial shares, but avoid everything else (consumer, banks)

Conclusion: We are facing conditions reminiscent to the 1930s because of policy mistakes, forgetting what we should have learned from John Maynard Keynes.

Bank of Spain Nationalizes Bankia – Property Bubble Bursting

Wednesday, May 9th, 2012

According to ZeroHedge, the Bank of Spain has recently nationalized Bankia, the first of many nationalizations that have to occur in Spain because of poor underwriting by the cajas (regional banks/savings and loan institutions) and falling real estate prices. The Spanish housing price graph above shows how much further the property bubble went in Spain, where at one point, more than 15% of the labor force was working in construction.

With a government debt to GDP ratio of 70%, and another 30%+ of municipal debt, where is Spain getting the money to accomplish these bailouts?

By Alexander Lemming, Leverage Academy Associate

Statement on BFA-Bankia

The Board of Finance and Savings Bank (BFA) announced today the Bank of Spain its decision not to buy in the terms and conditions agreed to the securities issued in the amount of € 4.465m who signed the FROB (Bank Restructuring Fund). BFA has concluded that the most desirable to strengthen the soundness of the business project that began with the appointment of Jose Ignacio Goirigolzarri as president is to request the conversion of these titles in stock ordinary. This conversion must be authorized by the Bank of Spain and the other authorities Spanish authorities and community and will be conducted in accordance with the valuation process established in the indenture securities.

The Bank of Spain has worked hard in recent months with the group address BFA-Bankia to specify the measures to ensure compliance with the provisions of the RD-l 2/2012 for the sanitation Spanish financial system. BFA-Bankia late March presented a restructuring plan and restructuring that included measures that would comply with the RD-l, and standardize its financial  position.

After analyzing this reorganization plan, the Bank of Spain also ordered the entity measures complementary to streamline and strengthen management structures and management, increasing professionalization and a divestment program. These additional actions should serve to enhance the soundness of the institution and restore market confidence. The events of the past weeks and the growing uncertainty about the future of the company has made it advisable to go further and raise the providing resources to accelerate and increase public sanitation.

The changes in the presidency of BFA-Bankia is precisely oriented in the direction shown in professional management and allow the group to boost its restructuring program. The new address of the entity must submit in the shortest possible plan of reorganization strengthened that places BFA-Bankia able to cope with a full guarantee its future.

In any case, BFA-Bankia is a solvent entity that continues to function quite normally and customers and depositors should have no concern. (ZHedge)

Italian 10 year Yield Rises Above 7.4%, Country Theoretically Unable to Fund Itself at These Levels (Bankrupt), Prime Minister Offers to Resign

Wednesday, November 9th, 2011

November 9, 2011: After Italian Prime Minister Berlusconi offered to resign yesterday, the credit markets almost sighed in relief. But today, markets were punched in the jugular as LCH.Clearnet increased margin requirements on Italian bonds. Margins were raised because 10 year credit spread exceeded 450 bps, the same point at which Clearnet raised margins on the bonds of other peripheral countries in Europe.
The pressure is certainly on the ECB and Italy now to find a solution to this debt crisis, as Italy is too large to be bailout out. Yesterday, known for his sex scandals and political corruption, Prime Minister Berlusconi was pressured to leave his post because Italian yields were creeping above 6.5%. According to the Times, “In the end, it was not the sex scandals, the corruption trials against him or even a loss of popular consensus that appeared to end Mr. Berlusconi’s 17 years as a dominant figure in Italian political life. It was, instead, the pressure of the markets — which drove Italy’s borrowing costs to record highs — and the European Union, which could not risk his dragging down the euro and with it the world economy. On Wednesday, yields on 10-year Italian government bonds — the price demanded by investors to loan Italy money — edged above 7 percent, the highest level since the adoption of the euro 10 years ago and close to levels that have required other euro zone countries to seek bailouts.”
Currently, the Italian 10 year yield has exceeded 7.4%, and the 2 year note has risen more than 10 year rate. At this point, Italy is theoretically unable to fund itself and could theoretically be bankrupt. The margin call on bonds due between seven and 10 years was raised by five percentage points to 11.65%, for bonds due between 10 years and 15 years it was raised by five percentage points to 11.80%, while for bonds that mature in 15 years and 30 years the margin call was raised by five percentage points to 20%. The changes come into effect Nov. 9 and will have an impact on margin calls from Nov. 10, the French arm of LCH.Clearnet said.

Soros Says the U.S. is Already in a Double Dip Recession – Defining Balance Sheet Recessions

Sunday, September 25th, 2011

Soros recently asserted that Europe could be more dangerous to the global financial markets than the default of Lehman Brothers in 2008, because of the political stubbornness of European policy makers.   He has been saying this for over two years now, while government officials continue to ignore him, focusing instead on making bold statements and causing riots.  In a brilliant move, Soros returned investor capital at the end of July to avoid the eyes of the public.  I am sure he is now short sovereigns via CDS, currencies, and synthetic instruments, while he continues to donate to the poor in Eastern Europe like a modern day Robin Hood.  Since March, Italian CDS has more than doubled, and French and Belgian CDS spreads will continue to creep higher as the sovereign crisis persists.  How are Greece, Italy, Spain, and Portugal supposed to grow their way out of debt, as deficit cutting reduces European GDP growth to less than 1%?

The public doesn’t trust officials to make timely decisions to protect the EU.   The PIIGS (Ireland and Italy included) pose an insurmountable task for the region, as the combined nations have far greater GDP and net leverage than Germany, the only country that will be supporting the EFSF with a AAA rating. Italy itself has €1.2 trillion of debt, which is  more than Germany, and France may be downgraded in the next 6 months, which is evident in how much its CDS spread has widened over the past 2 months.  France also cannot print money like the United States, and certainly should have been downgraded beforehand, sharply decreasing the effectiveness of the stabilization facility in the EU. A French downgrade would not only endanger French banks, it would create counterparty risk for its U.S. partners as well.  Soros has already claimed that the U.S. is currently in a double dip recession, which I personally think to be true.

Both the majority of the EU and the United States are in a global double dip already not only because of policy mistakes, but due to unsustainable leverage, overspending, broken healthcare and education systems, and corrupt governments. Recent real estate, manufacturing, and confidence numbers, along with revisions down in the earnings of major metallurgical coal and transportation companies in developed countries support my thesis (look at tickers ANR, WLT).  Alpha Natural Resources recently cited a sharp decrease in coal demand for steel production in Asia, reflecting weakness in both its U.S. and ex-U.S. clients.  In the U.S., real estate usually contributes 15% to GDP growth, and it is showing no chance of recovering (HOV), as most sales over the past two years have been distressed sales driven by investors, not families or single buyers.  Developed economies are slowing down quickly, as elected officials argue over who is more important than the other.  The S&P 500 ex-dividends is at the same level it was in 1998, the FTSE MIB in Italy is down 30% on the year (40% from April), and the emerging market index (EEM) just broke its 2010 lows.  Many European financial institution equities are down 60%+ to date.  Markets are broken, as the CME has to raise margins every other day to bring down the prices of precious metals, which are rising in the face of fiat destruction and future inflation risk.  Poverty has reached 15% in the United States, unemployment is over 9.2%, underemployment is about 17%, and local government cuts have resulted in the layoffs of countless public employees, like the recent 3,000 teachers who were fired in Providence, Rhode Island.

There are 44 million people on food stamps in the United States, which is supposed to be the wealthiest nation, and the land of hope for many immigrants.  Over 30% of the U.S. population pays more than half their gross income on rent, since incomes (adjusting for inflation) have not increased since 2000.  With rents projected to increase 3-4% in metropolitan areas over the next year, even the educated poor may be driven out of cities or on to the streets. The land of hope? Why don’t you ask my hardworking university friends about hope, who are much more qualified than some of their U.S. peers, but cannot get jobs and improve the quality of our economy due to the difficulty of obtaining visas.  This country was built by immigrants, who are now blocked out of entering the nation. Teen unemployment also hit decade lows this past month.

According to New York-based Economic Cycle Research Institute (ECRI), which tracks some 20 large economies contributing about 80% of the world GDP and provides critical information about upturns and downturns of economic cycles to money managers, we will know within the next 60 days whether we are in a recession or not.  ECRI’s Lakshman Achuthan has been one of the most accurate forecasters for economic cycles over the past decade.   He argues that the 2008/2009 recession was different than the sharp recession of the 1980s, “This is very different than the early 1980s. The issues that ail the U.S. economy and the jobs market today are not things that result from nearby events. What we’re living through and dealing with now has been building for decades,” he says. “If you look at the data, you see that the pace of expansion has been stair-stepping down ever since the 1970s, on all counts — on production, how much can we produce, how many jobs can we create, how much money do we make, how much do we sell. These are all trending down.” In the deep recession of the 1980s, GDP growth was 5%+ coming out of it…our growth in Q111 was revised down to 0.4%, and will be less than 2% for the year. Don’t believe me? Check on your own.

“If we do have a double-dip recession, Achuthan says, the people who are already having trouble finding work and paying bills are already in a depression and that they “are going to suffer more.”  ”It poses massive problems for policymakers because a new recession automatically increases all of these expenditures out of the public sector, while at the same time dramatically decreasing all their revenue,” he says. “So there’s even less ability to help the people who are hurting the most.”

Although I am not a fan of Roubini for his sensationalist gloom and doom scenarios, he does do decent research and predicted a 60% chance of a double dip in the U.S. three weeks ago.  The United States is in a balance sheet recession, as the economist Richard Koo, a strategist at Nomura, predicted may happen back in 2009.   Most of the growth we have experienced has been the result of continued fiscal and monetary stimulus from the United States government over the past three years, as well as inventory restocking.  The biggest driver of this slow and painful recession is that more stringent underwriting standards for real estate lending and small business lending are slowing down aggregate demand and GDP growth.  Koo argues that once you have a balance sheet recession, people focus on paying down debt, making the situation much worse over time.   The government has to increase fiscal stimulus for the entire duration of the private credit contraction cycle to overcome private deleveraging.  Unfortunately war and internal conflict has made this impossible in the United States as our debt to GDP nears 100%. Since the private sector has moved away from profit maximization to debt minimization, newly generated savings and debt repayments enter the banking system but cannot leave the system due to a lack of borrowers.  The economy here will not and cannot enter self-sustaining growth until private sector balance sheets are repaired.

If the government tries to cut spending too aggressively in 2012-2013, Koo thinks that we would fall into the same trap President FDR fell into in 1937 and that Prime Minister Ryutaro Hashimoto fell into in 1997.  The deflationary gap created by a lack of credit creation and fiscal stimulus “will continue to push the economy toward a contractionary equilibrium until the private sector is too impoverished to save any money.”  The economy will collapse again, and the second collapse will be worse than the first.  It will be difficult to convince people to change their behavior in this scenario.

In a typical recession, private sector balance sheets are not hurt very badly, and most still express profit maximizing behavior.  People borrow money and spend as interest rates are lowered.  In a balance sheet recession, consumers refuse to borrow even if rates are at 0%.  This results in asset prices collapsing and banking crises.  Banks then cannot lend into the private sector, and the government becomes the borrower of last resort, at extremely low rates, because banks don’t need to hold capital against government loans.  When people use money to pay down debt, they withdraw money from their bank accounts and pay it back to the banks, so both deposits and the money supply shrink, which actually caused the Great Depression.  For example, 88% of Obama’s tax rebates have been used to pay down debt.

Let me put it in perspective:

According to Koo, “The Board of Governors of the Fed in 1976 estimated that deposits lost in Depression-era bank closures and through increased hoarding of cash outside of the banking system explained just 15% of the almost $18 billion decline in deposits during the period. Meanwhile, bank lending to the private sector plunged 47%, or by almost $20 billion, from 1929 to 1932. The conventional wisdom is that lending fell because banks panicked in response to dwindling reserves and forcibly called in loans. But that same Fed study shows that bank reserves did not actually fall during that period, when borrowings from the Fed are taken into account. In addition, a survey of almost 3,500 manufacturers, undertaken in 1932 by the National Industrial Conference Board, showed that fewer than 15% of the firms surveyed reported any difficulty in their dealings with banks.”
If bank closures, cash hoarding and heartless bankers didn’t cause the Depression, what did? ”There’s only one possible alternative explanation for that era’s dramatic shrinkage in deposits and loans — or, at least, for the 85% of those shrinkages that can’t be attributed to the traditional villains. And that is that firms were reducing their debt voluntarily. At that time, the Fed tried to increase money supply by pumping reserves into the system, but with everyone paying down debt, the multiplier was actually negative, so it produced no results whatsoever.”
And companies became hellbent to pay down debt because — “The price of assets purchased with borrowed funds (as most had been, during the Roaring’20s) collapsed after the stock market crash, and companies’ leverage had already gotten extremely high before the Crash. In other words, companies in the 1930s faced the same balance sheet problems as Japanese firms confronted in the 1990s. The lesson we learned from our experience in Japan is that with the government borrowing and spending money, the money multiplier will stay positive, and that’s basically how Japan kept its GDP growing throughout its Great Recession. So we have a situation where fiscal policy is actually controlling the effectiveness of monetary policy. It’s a complete reversal of what almost everyone alive today learned in school — that monetary policy is the way to go. But once everyone is minimizing debt instead of maximizing profits, all sorts of fundamental assumptions go out the window.” Just like a severe asset price crash on leverage caused crises for the U.S. in the 1930s and for Japan in the 1990s, our real estate driven recession is more than just a manufacturing slowdown or a simple policy mistake.
In the U.S. we had over 150 bank closures last year, and have had 72 in 2011.  Banks are reticent to lend, but the real problem continues to be that there is less demand for money, and deleveraging will continue to weigh on growth for years. There are many parallels Koo describes with the Japanese crisis as well, which I will discuss in another article.
The worst part of our current situation in the U.S. is that new bank capital adequacy standards are making it even more difficult for banks to encourage private lending.  So banks do not wish to lend, lending standards have increased dramatically, and citizens don’t want to borrow…and now with a flat yield curve, I don’t understand how financial institutions are going to dig their way out of this mess with profits either. Thank you Ben Bernanke.  Your “operation twist” policy has eroded all profit potential for financial institutions in 2012.  Let the deleveraging continue…

Cheers, Singh

“As I said there is nothing wrong with failing. Pick yourself up and try it again. You never are going to know how good you really are until you go out and face failure.”
-Henry Kravis

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Eurozone Credit Risk, Defined

Friday, March 5th, 2010

Great description of Eurozone Credit Risk

Eurozone Sovereign Risk (CA Research)

First Credit Crisis – Ricciardi Family (1294)

Monday, February 15th, 2010

Vox recently published this article on the first credit crisis recorded in history.  Many economists tend to think that this phenomenon is a recent development, but throughout history, sovereign debt and credit contagion have been major issues. ~I.S.

It is widely believed that the current credit squeeze, leading to bank failures, is a modern phenomenon arising from the interplay of a historically unique set of circumstances that could not have been foreseen. But a team of academics – a finance professor and two medieval historians – at the University of Reading’s ICMA Centre has documented a medieval credit crunch that bears remarkable parallels with the current crisis.

The Ricciardi & Edward I

Before 1272, English kings had occasional dealings with Italian merchant societies, mainly in purchasing luxury goods for the household and arranging for balance transfers overseas. During the reign of Edward I (1272-1307), however, the king entered into a close financial relationship with one particular merchant society, the Ricciardi of Lucca (Kaeuper 1973). From 1275, the Ricciardi collected the newly-created customs duty on exports of wool, hides and wool-fells, worth around £10,000 per year, as well as receiving money from other sources of royal revenue. In return, they advanced significant sums in cash to the king and made payments to third parties on the king’s behalf, as and when ordered by royal letters. In total, between 1272 and 1294, the Ricciardi were involved in the collection and disbursement of around £20,000 per year, equivalent to roughly half of the king’s ordinary annual income. We could perhaps compare this arrangement to a modern current account, complete with extensive overdraft facilities (interestingly, Edward was usually overdrawn by £10,000-£20,000).

This relationship had great advantages for both parties. It allowed the king to anticipate royal revenues and so smooth the seasonal fluctuations in his income. Edward also enjoyed regular access to credit, allowing him to respond to unexpected events or undertake expensive projects without the burden of maintaining a large cash reserve. In return, the Ricciardi received some financial return on their advances, although this is usually hidden in the sources because of the religious prohibition on usury. We have calculated that, before 1294, Edward was probably able to borrow at rates of around 15% per year (Bell, Brooks and Moore 2009). Furthermore, the Ricciardi benefited from royal favour in their business dealings.

How were the Ricciardi and other merchant societies in a position to make such loans and investments? Their initial funding came from the partners of the society, who pooled their capital and received proportionate shares of any profits. Such involvement could be risky, because the partners could be held personally responsible for any debts owed by the society. They also received deposits, mostly from wealthy citizens of the Italian city-states (Hunt and Murray 1999). In addition, the Italian merchants profited from the management of papal taxes collected in England, and we would argue that this played a vital role in capital formation. In 1274 the pope had levied a tax on the clergy across Europe to support a new crusade, which raised a total of around £150,000 in England alone. The Ricciardi were one of several Italian merchant societies to act as papal bankers and were responsible for holding a portion (worth around £10,000) of the monies collected in England (Lunt 1939). This would have covered much of the king’s overdraft with them.

At any one time, most of this capital was committed to various ventures, including loans to governments and private borrowers, as well as investment in goods for trade. This was normally profitable, since this money was earning a good return, but it meant that the merchants only retained a small buffer of liquid capital. This was not ordinarily a problem, since most transactions could be carried out through credit, offsetting or balance transfers between merchants. When actual cash was needed beyond their own reserves, it could be raised from other merchants, either as a loan or by selling assets. For instance, the Ricciardi often acted as brokers raising loans for the king from a cartel of their fellow merchant societies (Kaeuper 1973). We can perhaps describe this as an early variant of the ‘Northern Rock’ business model, in that the Ricciardi relied on wholesale or interbank lending to fund their loans to the king.


The trigger for the global credit crunch starting in 2007 has been traced to the ‘sub-prime crisis in the US, as the resulting uncertainty meant that banks were unwilling to lend to each other, thus removing liquidity from the market. In the early 1290s, there was a similar crisis of liquidity, as the papal tax discussed above was gradually called in by the pope and the French king exacted large sums from the Italian merchants in his kingdom, leaving the merchant societies under-capitalised.

Initially, it seemed as though the Ricciardi may have been escaped the worst of this. In 1290, Edward had finally agreed terms with the pope to lead a new crusade and, in return, was granted access to the proceeds from clerical taxation in England. As a result, the merchant societies with whom the tax had been deposited were ordered to deliver a first instalment of 100,000 marks (£66,667) to the Ricciardi on Edward’s behalf (see Lunt (1939) and Kaeuper (1973). It is unlikely, however, that any money physically changed hands, since it would have been more logical for the merchant societies simply to transfer their liabilities from the pope to the Ricciardi. On paper, the Ricciardi would have been credited with the extra money, but there was a corresponding danger should Edward seek to withdraw this tax revenue at short notice.

Unfortunately, this was precisely the situation that arose in 1294, when war broke out between England and France. As he had before, Edward turned to the Ricciardi for money to fund his armies. Although, in theory, the Ricciardi should have been well-capitalised, it seems that, in reality, the greater part of their resources was tied up and, fatally, the wider lack of liquidity meant that they could not raise money on the interbank market. These difficulties were exacerbated by the Anglo-French war, which effectively cut communications between Italy and England and left the merchant societies unable to update the account books of their various branches across Europe.
In their defence, the Ricciardi, much like banks today, would argue that their difficulties resulted from a short-term liquidity squeeze and that, overall, their assets matched their liabilities. In practice, however, the Ricciardi were unable to provide the English king with the financial support that he desperately needed. In response, Edward removed the Ricciardi from their position as collectors of the wool custom and ordered the seizure of the assets (mainly wool but also loans to private individuals) held by the Ricciardi and other merchant societies. This dealt a mortal blow to the Ricciardi’s finances and effectively marked the end of their long-standing relationship with the English crown.


The Ricciardi initially sought to recover their position through a series of ‘credit swaps’ and netting between their creditors and debtors (Kaeuper 1973).1 They requested a new accounting with Edward, in the belief that his ‘overdraft’, combined with the proceeds of the confiscated wool and debts, would offset most of the outstanding papal tax. Their other main creditor was the pope, and the merchants tried to persuade him to take over the debts owed to them in France and in Italy, on which he was better-placed to collect. To draw another parallel with more recent events, we can compare this to government intervention, exchanging Treasury-backed bonds for the more illiquid assets held by the banks.

Unfortunately for the Ricciardi, they were unable to convince governments to support them.

In the short term, Edward’s decisive actions succeeded in recovering around £50,000 from the Ricciardi. However, the fall of the Ricciardi had significant costs in the medium-term, since Edward still needed to raise huge sums of money to pay for his armies, now fighting in Gascony, Scotland and Wales, as well as the subsidies that he had promised to his allies in the Low Countries and Germany. As a result, Edward was forced to turn to moneylenders who both lacked the resources of the Ricciardi and charged much higher rates of interest (we have found examples of annual rates at 40% and 150%) (Bell, Brooks and Moore (2009).

Applying this experience to the current crisis, it is clear that taking punitive action against the banks today would have much more serious economic consequences, given modern reliance on credit. Edward himself may have come to the same conclusion. By 1299 he had entered into another long-term financial relationship with the Frescobaldi of Florence. When the Frescobaldi complained that news of this had led to a run on their bank, Edward promised them £10,000 sterling in compensation.2 Relative to the English crown’s ordinary annual income of about £40,000, this commitment is in fact greater than the initial £50 billion bank recapitalisation proposed by the British government in 2008.

Furthermore, deprived of access to credit, Edward was forced to rely on heavy taxation and his prerogative rights of purveyance and prise (compulsory purchases of goods). He also over-issued wardrobe bills (essentially government IOUs) to pay for wages and supplies. All of these measures aroused political opposition in England, and contributed to a major constitutional crisis in 1297 (Prestwich 1988). By contrast, Edward’s opponent, Philip the Fair of France, sought to raise money by debasing the French currency, reducing the silver content of the coins by as much as two-thirds. The income (seigniorage) received from these recoinages meant that Philip did not have to resort to direct taxation to the same extent as Edward or incur the same level of debt (Favier 1978). It is possible, however, that the long-term consequences of the expanding money supply for the French economy were more damaging that the medium-term pain of high taxation and debt in England. We would argue that this has considerable modern resonance, as today’s governments begin to grapple with the problem of how to pay for the obligations that they are currently undertaking.


This essay arose from the findings of an on-going three-year research project with the aim of investigating the credit arrangements of a succession of English monarchs with a number of Italian merchant societies.The study, based at the ICMA Centre, Henley Business School, University of Reading, is funded by the Economic and Social Research Council (ESRC) under grant RES-062-23-0733. For more information see:


1 This is based on a number of internal Ricciardi letters that survive in The National Archives (TNA E 101/601/5) and have recently been edited in Lettere dei Ricciardi di Lucca ai loro compagni in Inghilterra,1295-1303, A. Castellani and I. del Punta (eds.) (Rome, 2005).

2 The original letter survives in the National Archives, TNA SC 1/47 no.120 and has been translated in R. J. Whitwell, ‘Italian bankers and the English Crown’, Transactions of the Royal Historical Society, New Series, 17 (1903), pp.198-9.


Bell, A. R. C. Brooks, and T. K. Moore, ‘Interest in Medieval Accounts: Examples from England, 1272-1340’, History (forthcoming, Oct 2009).

Favier, Jean (1978), Philippe le Bel, Fayard

Hunt and Murray (1999) A History of Business in Medieval Europe (Cambridge, 1999)

Kaeuper, R. W. (1973) Bankers to the Crown: Edward I and the Ricciardi of Lucca (Princeton).

Lunt, W. E. (1939) Financial relations of the papacy with England to 1327 (Cambridge, Mass.), pp.311-46.

Prestwich, M. (1988) Edward I, London

Whitwell, R. J. (1903) ‘Italian bankers and the English Crown‘, Transactions of the Royal Historical Society, New Series, 17 (1903), pp.198-9.

For more information, please visit VOX…