Italy’s ministers were in emergency session on Thursday night to thrash out the rescue terms for Banca Monte dei Paschi di Siena, finally ending a financial soap opera that has dragged on for years and done enormous damage to the country.
The impending nationalisation of Italy’s oldest bank has been welcomed by bouyant markets as a cathartic release, restoring confidence and opening the way for the recovery of the crippled Italian banking system.
“A solution is now in sight. I really believe Italian banks are turning the corner,” said Lorenzo Codogno, former chief economist of the Italian treasury and now at LC Macro Advisors.
The state bail-out is likely to entail urgent action to safeguard the bank’s liquidity, down to €10.6bn and vanishing at an alarming speed. This will be buttressed a “precautionary recapitalisation” with hair-cuts for junior bondholders under the EU’s draconian rules on burden-sharing.
The money will come from a new €20bn state rescue fund with enough firepower – at least for now – to cover Carige, Veneto Banca, and other lenders in varying degrees of trouble.
The MIB index of equities on the Milan bourse has risen 18pc over the last three weeks on growing hopes of a benign state rescue, one that averts a full-blown crisis and allows the credit-starved Italian economy to start breathing again.
It has been clear for days that Montepaschi (MPS) has no hope of raising capital from Qatar and other ‘anchor investors’ needed to hold together a €5bn restructuring, and to unload €27bn of non-performing loans.
The Renaissance bank, founded in 1472 to provide charitable loans to “poor or miserable or needy persons”, came to grief after ill-judged expansion at the top of the financial cycle. It was misused as a patronage machine by local politicians.
Yet despite the sorry saga in Siena – and chronic overmanning – the Italian banks have mostly been well-behaved. Impaired loans have reached €356bn, or 16.4pc of balance sheets, but this is the legacy of a lost decade that has shrunk the economy by 8pc.
The eurozone shares responsibility for this. Premature monetary tightening and austerity overkill from 2010-2012 had a devastating effect on Italy, pushing the country into a deep double-dip recession.
The €20bn rescue fund amounts to 1.2pc of GDP and is a small fraction of the sums spent by Germany and North European states rescuing their banking systems after the Lehman crisis. By unlucky timing, Italy must act under much tougher EU rules on state aid and ‘bail-ins’ now in place. This has led to contagion fears – a side-effect that Brussels failed to anticipate – and greatly complicated the search for a solution.