In this article, I will be discussing the latest in the Monte Dei Paschi saga and the recent developments with America’s dealings with Russia. These two stories don’t mix, but neither have enough content to fill an article. With Monte Dei Paschi, there is continued political squabbling over what will occur in terms of the bailout. The foes are Germany and Italy. With Russia, America is facing an interesting turn because Trump could potentially become warmer towards the country. It also means a political squabble could occur within his own party. Trump never was a true Republican, so this makes sense.

Monte Dei Paschi

To brush up, Monte Dei Paschi failed to raise 5 billion euros in the private market to prevent the need for a bail-out by the Italian government. The ECB rules are somewhat arbitrary, but the initial goal of the 2014 regulations were to eliminate bail-outs of banks without the bondholders taking some of the losses. This is considered a bail-in. Bail-ins make more sense because they are more affordable. The Italian banks have $360 billion euros in bad loans, so the private market, the Italian government, and the bondholders need to put all ‘hands on deck’ to get the situation resolved.

The initial reason for this Italian crisis can be traced to the European Union itself because the euro currency is too expensive for Italy to compete on the global scale. Italy and other countries are making the euro cheap which helps finance Germany’s exports. It’s a failed concept which is why I push towards expecting this Monte Dei Paschi situation becoming the final nail in the coffin of the EU.

The latest rhetoric from this story is the Italian officials are not pleased with the increase in the amount the ECB states Monte Dei Paschi needs to be bailed-in. The letter from the ECB had five lines where it said the bank needs 8.8 billion euros instead of 5 billion. The reason is simple; the bank has lost depositors. However, the Italian politicians need to latch onto something, so they are complaining there wasn’t an explanation given for the change. The ECB is quick to manipulate the rules, so I’m never shy to criticize it, but in this case, it did nothing wrong.

To put an analogy to this situation, this is like a tenant of an apartment who hasn’t paid the rent for 4 months and is mad he didn’t get an explanation on why his belongings were removed from the house. What explanation is needed? The man didn’t pay his rent. In Monte Dei Paschi’s case it’s clear the bank needed more money because of the amount depositors have taken from the bank since the 5 billion-euro estimate was given in late-2015.

Proper explanation will occur over the next 2 or 3 months when the final details of the agreement are hammered out. The ECB wants the bank to come out of the situation healthy to inspire confidence, so this problem is not revisited in the future. The goal is to get the bank’s Common Equity Tier ratio to 8% under a stressful situation. This would be below the 9.4% average of the banks in the ECB stress test, but Monte Dei Paschi finished in last place in the 2015 stress test, so that may be a reasonable goal.

Russian Diplomacy

President Obama issued sanctions against Russia because of its alleged hacking into the DNC and leaking the emails from officials. This leak potentially impacted the presidential election although it’s more likely that the reinstatement of Hillary’s email case by FBI Director Comey played a bigger role in her election loss. The White House Sanctioned two Russian intelligence agencies, four officers in the GRU, which is its largest intelligence agency, and three companies that support the GRU.

Speaker of the House, Paul Ryan supported this move saying it was appropriate and overdue. This decision by President Obama pits the GOP Congress against President-Elect Trump. President Trump doubts the veracity of the claims that Russia was behind the hacking of the DNC emails, saying we don’t know who was behind it. Trump considers the blaming of the election loss on the Russians the equivalent of sour grapes.

Because this issue has been started by President Obama, I now expect this to be the first issue where President Trump will have a disagreement with his own party. I am of the belief that President Trump will have a lot of disagreements with his own party, but he will use the bully pulpit to get his way. His version of the bully pulpit is his 18 million followers on Twitter. We will get a taste of whether he plans to compromise or attempt to get his way by what he does with Russia. He plans to get an intelligence briefing and meet with the GOP leaders in Congress before making a decision. He can then either decide to lift the sanctions against their wishes or keep them on. Trump ran on having an amicable relationship with Russia, so he can either break his campaign promise or ignore what his party thinks. Trump ran for President against Paul Ryan in one sense, but in another sense, he also said he would work with Congress to make good deals.

I expect Trump to lift the sanctions. It will take skill as a politician and negotiator to appease the GOP Congress on this issue. Trump will never appeal to the war hawks Lindsey Graham and John McCain, but he doesn’t have to. He just needs to get a majority of the party on his side to make it look like he isn’t acting alone on this policy. The reason I am focusing on this is because Trump has disagreements with the GOP on economic policy as well. He can either work with is party or work alone to try to get what he wants passed.

It’s quite something to have his own party against him. It makes things twice as hard because he also will have to work with the Democrats. Even though Obama blamed the GOP Congress for not letting him get things done, it backfired on him as the Democrats lost seats in Congress from the beginning of his presidency. Trump will need to work with the Democrats instead of demonizing them. This all makes for a complex situation as far as what economic policies will be enacted in 2017. That’s why I think the market is getting ahead of itself by rallying so much in the past few weeks.