Föhrenbergkreis Finanzwirtschaft

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Italy Is Up Against the Wall With Bank Bailout

Posted by hkarner - 11. Dezember 2016

Date: 10-12-2016
Source: The Wall Street Journal

Rejected extension for Banca Monte dei Paschi’s restructuring means tight deadline risks for investors

European regulators have rung the bell for Banca Monte dei Paschi di Siena, Italy’s third-largest and most troubled lender.

The bank asked for more time for the country’s political situation to settle down before it had to complete its €5 billion ($5.31 billion) recapitalization, which already looked difficult before Prime Minister Matteo Renzi lost a referendum this week and resigned.

The answer was no. This is most likely because European regulators worried that if they granted one extension from the Dec. 31 deadline, there was no guarantee that they wouldn’t be asked for another and another, all while allowing the problems of more Italian banks than just MPS to fester.

va-beneThe question now is whether MPS has enough time to complete its recapitalization and if it fails, what are the implications for retail investors in its junior bonds and for other Italian banks. UniCredit, Italy’s biggest bank, is expected to announce a plan to raise up to €13 billion of capital at an investor day on Tuesday.

There is a chance, although it is vanishingly small, that a new government is formed over the weekend that looks stable enough for large investors, including Qatari and U.S. funds, to commit to backing an MPS share sale. That would allow the bank to launch a wider public sale and see if it can meet its target.

The more likely outcome is some form of public cash injection. New European rules on how to deal with failing banks make it almost impossible to use public funds without imposing hefty losses on existing equity and junior debtholders.

The problem is that about half the bank’s junior debt is owned by retail investors—otherwise known as voters. MPS has reached this dire predicament in part because politicians, including Mr. Renzi, have been unwilling to deal with this fact.

Italy can afford to put money into MPS and a handful of others weighed down by bad loans that also need to be cured; €10 billion to €15 billion could be plenty. But it is the law, not the cost, that matters now.

For the rest of the Italian banks, any solution could be good so long as they don’t have to cough up cash to cover losses at other banks, as happened last year.

Amid all of this uncertainty, something strange happened. Italian banks had their best stock price performance since 2009 before Friday afternoon, seemingly on the back of the idea that it looked increasingly likely that MPS would have to be bailed out.

Investors were backing the idea that Italy would form a relatively technocratic and stable government—and that one way or another the problem of MPS would finally be solved without major systemic fallout. Both ideas may yet prove optimistic.

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