As Fears of “Bank Run” Escalate, Italian Banks Get €150 Billion Bailout of Empty Promises

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An elaborate confidence game.

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

In today’s Europe, the most important rules are made to be bent, if not outright broken. So it goes with Italy’s blossoming banking crisis.

Earlier this week, Italy’s €40-billion bailout proposal was mercilessly scrapped by Germany, on the grounds that it contravened Europe’s new bail-in rules. Cue Plan B, as reports surfaced today that the EU had authorized the country to use “government guarantees” to create a “precautionary liquidity support program for their banks. The total amount currently doing the rounds is €150 billion.

That’s a lot of money, even by today’s inflated standards. In the initial bailout of Spain’s saving banks, in 2012, the EU provided Rajoy’s government with just €40 billion of fresh cash. If the latest reports are true, Italy just received almost four times that amount.

But did it, really? Does the money even exist?

After all, government guarantees are not the same as cash in hand. According to Reuters, the ECB’s latest move, which has received scant attention in the press, is more of a political stunt than a prudential one:

[The funds] won’t actually be used, and don’t solve banks’ main problem – capital holes. Instead, the aid has a secondary purpose: to show Prime Minister Matteo Renzi can do deals in Brussels…

Italy is using the panic from the UK vote to ask the European Commission to let it bail out its banks and skip state-aid rules. Getting the green light would provide an even bigger boost to Renzi’s chances in the referendum, yet the Commission may not approve such a flagrant bailout. As such, getting the go-ahead even on unused guarantees is a start.

The word “unused” is a curious choice of term, especially given that the same article stresses that the funds won’t “actually” be used, for the same reason that they would constitute illegal state aid and contravene the EU’s new bail-in rules. In other words, they will be unusable, which is surely a roundabout way of saying “useless.”

The Commission has also stipulated that only “solvent” banks are eligible for the “precautionary” scheme, as if Italy, where banking stocks have fallen by a mind-blowing 54% in just the last six months into penny-stock territory, is just brimming with banks that are perfectly solvent but would nonetheless appreciate the kind offer of new funds they can’t use.

The scheme is clearly a desperate ruse, but if it can temporarily convince enough voters, investors, and bank depositors that things are not quite so bad in Italy anymore, that the banks finally have something of substance — and not just unusable, inaccessible funds — backstopping their €360 billion worth of non-performing loans, it will have served its purpose.

Perhaps things might even improve enough to enable Italy’s Prime Minister Matteo Renzi to buck recent trends in Europe and actually win a national referendum, scheduled for October, which would allow him to ram though changes to the country’s constitution. If he doesn’t, it could, as Reuters warns, become a vote against him, or yet another against the European Union, and sink the government:

Banks’ collateral might then collapse if markets start to fear the radical Five Star Movement is about to win power and take Italy out of the euro zone. Fears of a bank run could escalate if Italian banks start to fail European Central Bank stress tests.

The race is on for Italy to create a big enough cushion for Italy’s chronically under-capitalized, bad-debt bedeviled banks before publication of stress test results, expected at the end of July. According to the Financial Times, senior bankers fear the banks will “emerge poorly” from the tests, triggering yet another cascade in share prices.

Fortunately, in February, the ECB came up with an ingenious strategy to make sure that probably doesn’t happen: not a single bank will be able to pass or fail. In the words of the European Banking Authority, they are in a “steady state” and are therefore expected to remain that way.

Thanks to this elaborate confidence game, based on stress-free stress tests and unusable financial backstops, Italy’s — and Europe’s — day of reckoning may be put off for just a little while longer. But the tensions continue to build under the surface.

The ultimate irony is that if the ECB cannot save Italy’s banks from their fate, the chances are that the one country that finally topples the Eurozone’s flimsy house of cards will be the same country whose financial system had been supervised (a term I use in the loosest sense) for six years by current ECB President Mario Draghi. As the old adage goes, what goes around comes around. By Don Quijones, Raging Bull-Shit.

And for the EU to try to make an example of the UK will likely backfire. Read…  Who Really Holds the Cards in the EU-Brexit Stand-off?

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  12 comments for “As Fears of “Bank Run” Escalate, Italian Banks Get €150 Billion Bailout of Empty Promises

  1. Kenny Lee
    June 30, 2016 at 11:58 pm

    I have a feeling that a run on the Euro is already underway. People have a sinking feeling that the Euro is going to zero. This 150 billion Euro if my guess is correct will be used to buy PMs.

  2. VK
    July 1, 2016 at 3:18 am

    Why is the whole process so convoluted? I mean the ECB gave out €400 Billion at 0% interest for 4 years last Friday to avert any Brexit crisis in the banking system. So why not just recapitalize the banks directly? Get this over with and let humanity move on. The ECB can create trillions from thin air, so why not allow the banks to issue new shares and buy them up directly? The other option is to let the governments buy the new shares and then take out govt bonds which the ECB buys up. Once the banking system is healed, society can get back to what it was doing and we avert larger socio-economic fallout – unemployed youth and the rise of extremism. The cost of extremism will be priced in the lives of tens of millions of people, the cost of direct bailouts in billions of imaginary pieces of electrons. What’s worse?

    • WoogieBoogie
      July 1, 2016 at 4:20 am

      If they do that, they would finally admit that money is worthless and can be created in infinite amounts. Look back in history and read about what hyperinflation leads to. The final stage in all cases is war. The only question here is if it will be worse to kick the can down the road or not. In my opinion they should let the market correct itself. But my opinion does not help politicians, so it’s out of the table.

      • VK
        July 1, 2016 at 8:53 am

        There’s a drug dose response at play here. Two tablets of paracetamol will cure a headache, twenty will probably lead to death. We’ve seen trillions in money printing but it hasn’t given rise to hyperinflation because of the sheer amount of debt out there – north of $250 trillion plus the impairment of global bank balance sheets has rendered them unwilling to lend. So even dollars ten trillion of bank recapitalization with over $250 trillion in global money supply doesn’t amount to much, just 4% of the total money out there. If it stabilizes the system, why not? The cost has been horrendous so far for the vast majority. Humanity should be worried about advancing our pool of useful knowledge as opposed to worrying about imaginary digits.

    • nhz
      July 1, 2016 at 4:30 am

      yes, why not give out 10 trillion or so at 0% interest for 30 years so everyone in Europe can buy their own palace, retire and live the good life ever after?

      Actually, this is close to what is already happening in the mortgage markets; only the interest rate is still a little bit above 0% (I’m sure Mario is working on it). On the other side, more so than the banks who are loaning this 400 billion from the ECB, many of the ordinary people who are taking the mortgage money count on never having to pay it back with real money.

      These ‘solutions’ don’t heal, they only postpone the reckoning and make things much worse.

      • Pete
        July 2, 2016 at 11:05 am

        Yes, free ponies for everyone!

  3. JoePlateau
    July 1, 2016 at 12:17 pm

    To me the biggest puzzle has been the complete absence of inflation with all QE since 2008. But, then the inflation probably only showed up in paper assets.

    My prediction would be that negative interest rates might cause inflation, as people will take their money out of the banks, and that will lead to real moneyprinting by the central banks and thus hyperinflation.

    In this regard it is interesting to note that the only time in history that German bonds had negative yields was in 1922-23, and then we got real inflation.

  4. ERG
    July 1, 2016 at 1:01 pm

    What ‘absence’ of inflation?

    By the 1980 metric we are somewhere near 8 or 9 percent:

    • JoePlateau
      July 2, 2016 at 4:23 am

      That is a fair point, thanks for the chart.

      • ERG
        July 2, 2016 at 8:14 am

        You’re welcome. That is an excellent site. Take a look at the REAL unemployment numbers he has there when you get a chance. The government has been moving the goal-posts to cover their failed policies for the last 30 years. Living proof that if you torture the data enough, you can get it to confess anything.

        Following the self-evident principle that nothing in life is free, there has to be SOMEBODY paying for all the ‘free money’ that was created in the last 8 years – and that would be all of us. The other side of the same coin is/will be all the business failures that will take place when the unavoidable correction takes place.

    • nhz
      July 2, 2016 at 12:46 pm

      yes, very similar story in Europe.

      Rents (outside the subsidized sector), mandatory healthcare insurance/taxes, public transport, all kinds of other taxes, energy bills – it’s all rising at least 5-10% yearly despite ‘absence of inflation’. The Ministry of Truth simply removes all those items from the statistics through clever fudging with the numbers (it also helps that next years TV has again more megapixels …) and most of the sheeple believe them.

      Even social security benefits and income for low level government workers have increased hugely in 15 years despite ‘almost no inflation’, but of course that is because our politicians care for us (at least for those who depend on the government).

      If you look at other items it is also obvious that we had massive inflation since the start of the euro currency: euro goldprice has increased by about 400%, home prices in many EU countries increased 100-200% (on top of a previous huge runup of e.g. 500% in Netherlands). The elite should know, just look at the prices paid for trophy art, trophy homes, trophy cars, classic cars, etc. – their inflation is often over 20% on a yearly basis ;-)

      And this may be just a taste of things to come ;-(
      The only place where inflation is absent is in the lying statistics.

  5. d
    July 2, 2016 at 3:19 am

    Draggi apperas to be down to confidence trick’s as the GERMAN’S, WILL NOT LET HIM HAND OUT THEIR MONEY.

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