Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

State rescue of Italian bank Monte dei Paschi is a cathartic release

Posted by hkarner - 22. Dezember 2016

Monte Paschi CCBanca Monte dei Paschi di Siena began in 1472 as charitable lender to the poor

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.

Italy
Italy’s bank rescue is tiny compared to those of Germany, Spain, or Belgium.  But it comes under new EU rules and this has poisoned everything. Credit: Oxford Economics

Pier Carlo Padoan, the finance minister, said there is some scope to “minimize” the haircuts imposed on MPS bondholders. This should protect senior debt, and limit losses to around 50pc on junior debt.

Such an arrangement reduces worries of sweeping losses and reduces the risk of toppling dominoes as funds mark out the next victim. Whether the MPS formula can in fact be used for other banks in unclear, since they do not qualify as “systemically relevant”.

The Italian state will be allowed to compensate some of 40,000 retail investors shunted into MPS bonds without understanding the risk, but these rebates will be partial, glacially-slow, and conducted on a means-tested basis.

Fabio Fois and Giuseppe Maraffino from Barclays said the rescue falls short of a “systemic solution”, arguing that funding is too thin and the MPS model cannot easily be replicated. “We estimate that the largest six Italian banks could need about €30bn in total to clean-up their balance sheets,” they said.

Some analysts think it could take €50bn, or more if the next global downturn hits early. If so, this risks another messy drama a year hence in even less hospitable circumstances.

Mario Monti, Italy’s former premier, told a forum in London that the now-departed government of Matteo Renzi was to blame for allowing the banking crisis to fester for so long. It wasted crucial time and political capital on a needless constitutional referendum that split the country.

Defenders of Mr Renzi said intransigent EU authorities made it worse by pushing matters to the brink, and the EU itself destabilized Italian banks with arbitrary stress tests and pro-cyclical capital rules that choked Italy’s economy.

Whether Italy is out of the woods remains a burning question. The €20bn rescue fund pushes sovereign debt to 134pc of GDP, ever deeper into uncharted territory. Rising global yields have hit Italy hard and imply losses on €400bn of government debt owned by Italian banks, eroding core capital levels.

The European Central Bank will start cutting its monthly bond purchases from €80bn to €60bn in March, and the programme expires at the end of 2017. Italy will no longer have a buyer of last resort mopping up its debt.

“Tapering leaves some countries in a naked position. They have taken too much comfort from the ECB umbrella,” said Mr Monti, speaking to the Official Monetary and Financial Institutions Forum.

Hanging over everything is the growing likelihood of early elections in mid-2017, opening the way for an unholy alliance of the Five Star Movement, the Lega Nord, and other eurosceptic groupings. Together they could command half the vote.

For now Italy can breathe a sigh of relief, and the world’s most ancient bank lives on to fight another century.

 

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