Even supposedly good debt on banks’ books may end up putrefying.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
This week the world’s oldest surviving bank, Monte dei Paschi di Siena, tried to give itself a new lease of life by bringing in fresh blood at the top, following revelations that the Italian lender’s chief executive, Fabrizio Viola, and former chairman, Alessandro Profumo, are under investigation for alleged false accounting and market manipulation.
But the change of guard did nothing to improve market sentiment or performance. By Friday MPS shares had sunk to their lowest point ever — just 21 precarious cents above zero — and, once again, they had to be halted by Italy’s FTSE MIB.
MPS’s new boss Mario Morelli (formerly of Bank of America-Merryl Lynch, Unicredit and Intesa), faces an insurmountable challenge trying to steady the leaking ship. MPS must raise up to €5 billion as part of an emergency rescue plan to stave off the risk of being bailed in, and consequently wound down or chopped up into little pieces and gobbled up by its rivals.
Given that it would be the bank’s third cash call in as many years, investors are understandably reticent to pour yet more funds into the bottomless pit, Reuters reports:
(The bank’s) 45-billion-euro mountain of bad loans is deterring investors from backing it in its third recapitalization in as many years, according to four leading European fund managers and the investment banking source with knowledge of the matter.
Since the private sector-backed rescue blueprint was announced in late July, hundreds of investors had been sounded out about buying stock but interest has been lukewarm, said the source.
This could be bad news, given that for MPS’ latest rescue plan to have any chance of working, both parts of the plan — Part A and Part B — must succeed.
Part A consists of a €28 billion bad-loan sale for which JP Morgan Chase, Citi and Italian investment bank Mediobanca are already assembling a bridge loan, in return for very handsome fees. Atlante, Italy’s deeply opaque, Luxembourg-based bank rescue fund, has reportedly agreed to buy the so-called mezzanine tranche in Monte dei Paschi’s bad loan securitization.
Apparently demand for heavily discounted, slowly-decomposing bank debt in Italy is high, which is great news considering Italy is purportedly home to roughly a third of all of the bad debt at EU banks. In a perfect sign of our yield-starved times, last week saw around 250 global investors converge on Venice to attend Banca Ifi s SpA’s “Non-performing Loan” conference. That’s twice as many as last year, reports Bloomberg.
In other words, Part A of the rescue plan seems to be coming along nicely — as long as no one asks who will make up the difference between the book value of the bank’s toxic assets and the discount value at which they’re now being sold.
As for Part B of the Plan — MPS’ €5 billion cash call scheduled for the end of this year — it’s going nowhere fast. Twice-bitten, thrice-shy investors are no longer buying the hype. Gennaro Pucci, chief investment officer at London-based investor PVE Capital, said that even if a significant proportion of MPS’ bad loans were “spun off into a special vehicle,” he would not buy more MPS shares out of fear that the bank could suffer further losses from the remaining soured debt.
This is a serious problem in today’s Italy: as long as the economy continues to stagnate, much of the supposedly good debt currently on the banks’ books will also, sooner or later, end up putrefying. It’s already happened to Banca Popolare di Vicenza, a regional lender that was rescued from bankruptcy late last year by the Atlante fund, but which is already in need of fresh funds.
So, too, is Italy’s biggest and only global systemically important financial institution, Unicredit, which has a staggering €80 billion in bad debt on its balance sheets — more than any other European bank. While the downfall of MPS would be enough to cause serious damage to Italy’s already fragile financial system, the collapse of Unicredit, which has vast, sprawling operations across Germany and Eastern Europe, would threaten the stability of the entire Eurozone.
Hence, Unicredit’s frantic efforts to clean up its books. According to The Wall Street Journal, in the coming months Italy’s largest bank plans to fatten its capital cushion by at least €8 billion. It’s also contemplating unloading, in one fell swoop, as much as €20 billion of its bad loans.
But with so much bad debt being offloaded at the same time, who’s going to buy it all? Top candidates: the Italian government and/or the ECB. But that is currently out of the question.
New EU regulations make it almost impossible for Eurozone governments to bail out domestic banks — at least not until the banks’ creditors, including uninsured depositors (those with over €100,000 in their accounts) and bondholders, have been forced to bear some of the burden, as should happen in any business restructuring or bankruptcy.
The problem here is that as much as 40% of Italy’s bank bonds are held by retail investors — many of whom are traditional voters of the governing political party. There’s also the risk that a bail-in of one institution could very quickly evolve into a bank-run on all of them. And that would not only spell the end of Prime Minister Matteo Renzi’s term in office; it would cement the rise of the anti-austerity, anti-euro Five Star Movement.
In the face of such risks and constraints, Italy faces an impossible mission in trying to stabilize its financial sector. With anti-European sentiment on the rise in Germany and the nationalist Alternative for Germany party breathing down her neck, Merkel is determined not to give an inch on the issue of an Italian bailout — at least not until after Germany’s federal elections, scheduled for October next year. Judging by the current state of play, that will almost certainly be too late.
In fact, the only thing that might save Italian banks from their current predicament is if Germany’s own too-big-to-fail monstrosity, Deutsche Bank, were to be bailed out first. The way things currently stand, that’s not out of the question. By Don Quijones, Raging Bull-Shit.
Things could get very ugly, very fast, if those bank bonds collapse. Read… Goldman Sachs Just Launched Project Fear in Italy