Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

Fears Italy may need €40bn bail-out for its crumbling banks

Posted by hkarner - 29. November 2016

Italy’s wunderkind Matteo Renzi has wrapped himself in the Italian flag. The EU flag has disappeared as he fights for his political life

Markets are bracing for a string of failures in the Italian banking system and a possible EU bail-out, fearing defeat for Matteo Renzi’s reformist government in a crucial referendum this weekend.

Shares of Banca Monte dei Paschi di Siena (MPS) crashed 11pc on fears that a €5bn plan to recapitalise the broken lender could unravel if a ‘No’ vote leads to months of political turmoil, potentially bringing the anti-euro Five Star Movement closer to national office for the first time.

Italy’s biggest bank Unicredit fell 4.3pc and is approaching lows last seen in the financial panic in July. It has lost almost two-thirds of its value over the last year.

Sources in Rome say the Italian government may have to turn to the European Stability Mechanism (ESM) for a bank rescue, a humiliating and painful course that must be approved by the German Bundestag and other EMU parliaments. It would amount to a partial ‘Troika’ administration under terms dictated by the EU.

“We think the banks will have to raise €40bn in fresh capital. This is going to need an ESM bail-out,” said one senior Italian banker.

“The problems in the banks are becoming an excuse to put Italy under an EU programme. It won’t happen under Renzi because he won’t be there any longer after a ‘No’ vote. What we expect is a technocrat government that pushes this through,” he said.

Pier Carlo Padoan, the finance minister, has been widely touted as the next premier, though his appointment at this delicate juncture would invite a populist backlash.

Italy
Italian bad debts are 18pc of bank balance sheets, but only the red ones are really, really bad  Credit: Banca d’Italia

Tensions are rising. A sell-off in Italian sovereign bonds is driving a nasty ‘feedback loop’ for the financial system since the country’s banks own €400bn of this debt. They are now nursing big paper losses that must be partially ‘marked to market’ on a quarterly basis, eroding their core capital ratios even further.

Yields on Italian 10-year bonds have doubled since the late summer, pushing the risk spread over benchmark German Bunds to a two-year high of 191 basis points.

The worry is that weaker lenders such as MPS, Veneto Banca, or Popolare di Vicenza, could be forced into closure since they have lost access to the capital markets and cannot raise fresh money. This would wipe out bondholders under the EU’s draconian resolution regime.

Premier Renzi has been lashing out at Brussels, bedecking his office with the Italian Tricolore flag and adopting an openly eurosceptic tone. “I couldn’t care less what the European Commission says. The time for Diktats is over,” he said.

Mr Renzi is angry that new rules have forced Italy to ‘bail in’ small savers, often shunted into forms of bonds without being aware of the risk. Worse yet, EU rules make it almost impossible for the Italian state to rescue the banking system and restore confidence.

The EU banking union has never got off the ground because Germany is still blocking any form of risk sharing, let alone agreeing to debt mutualisation to clear the legacy problems from the eurozone crisis. Italy is caught in the worst of all worlds.

Italy
The risk spread on Italian 10-year bonds over German Bunds is soaring Credit: Il Sole

Luigi Zingales from the University of Chicago says Italy needs a state plan to recapitalize the banks along the lines of the US Treasury’s ‘TARP’ programme eight years ago, but this is prohibited by EU state aid rules.

Ignazio Visco, the Bank of Italy’s governor, said distressed lenders will be forced to conduct a “fire sale” of their non-performing loans (NPLs). “Some may have a tough time,” he said.

Mr Visco said the rules were poorly drafted and cut across the ability of national regulators to deal with systemic risk, noting acidly that North European countries bailed out their own banks during crisis but then imposed the new regime just when Italy needed to do the same. “The timing has been unfortunate,” he told the journal Central Banking.

The governor insists that Italian banks were victims of a credit crunch caused the eurozone’s double-dip recession by the “external shock” of the sovereign debt crisis. Little of this was their fault.

The Bank of Italy says NPLs have come down slightly to €356bn, or 17.7pc of balance sheets. The closely-watched ‘Texas Ratio’ of NPLs to equity capital and loan loss reserves is 101pc, above the triple-digit danger line.

Italy
Capital outflows from Italy are raising eyebrows. The data is picked up in the ECB’s ‚Target2‘ payments system Credit: Project Syndicate

These figures are extremely high but the headlines may overstate how bad the picture really is. The NPL tally is arguably in single digits once adjusted for the long delays in clearing up old cases in Italy’s glacially-slow court system.

“If we consider bad loans proper, we end up with an amount close to €90bn. A number of large, well-capitalized and profitable banks are thriving,” said Mr Visco.

In the end, nobody is going to let large parts of the Italian banking system collapse. The problem could be solved with a capital infusion equal to roughly 2pc of GDP, less than the rescues in Germany, Belgium, Holland, or the UK after the 2008 crash.

The only question is how this is done. Mr Renzi would probably rather eat marble than accept an ESM take-over of Italy, even if it is only a ‚Troika-lite‘ variant.

He might instead order the Italian treasury to bail out the banks in breach of EU rules and present Brussels with a fait accompli. But Mr Renzi may not be prime minister in a week’s time.

 

Schreibe einen Kommentar

Bitte logge dich mit einer dieser Methoden ein, um deinen Kommentar zu veröffentlichen:

WordPress.com-Logo

Du kommentierst mit Deinem WordPress.com-Konto. Abmelden / Ändern )

Twitter-Bild

Du kommentierst mit Deinem Twitter-Konto. Abmelden / Ändern )

Facebook-Foto

Du kommentierst mit Deinem Facebook-Konto. Abmelden / Ändern )

Google+ Foto

Du kommentierst mit Deinem Google+-Konto. Abmelden / Ändern )

Verbinde mit %s