Why Italy’s Banking Crisis is Spiraling to Heck

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€4.8 billion window-dressing to cover a growing €360 billion hole

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

Things have got so serious in Italy that the only two things propping up the country’s crumbling banking sector — apart from the last few remaining crumbs of public faith in the system — are two inadequately capitalized bad bank funds, Atlante I and the imaginatively named Atlante II.

Both funds are operated by a deeply opaque Luxembourg-based private firm called Quaestio SGR. The firm is a wholly owned subsidiary of Quaestio Holding S.A, which is itself jointly owned by a bizarre mishmash of organizations, including Fondazione Cariplo (37.65%), an influential “charitable” banking foundation; Fondazione Cassa dei Risparmi di Forlì (6.75%), a regional savings bank; Cassa Italiana di Previdenza e Assistenza dei Geometri liberi professionisti (18%), a bank for professional freelance surveyors (no, seriously); Locke S.r.l. (22%), an obscure Milan-based holding company; and Direzione Generale Opere Don Bosco (15.60%), a Roman Catholic religious institute. No surprises there.

[Hat tip to regular WOLF STREET reader and commenter MC for pointing out some of the peculiarities of Italy’s two bad banks]

Atlante I’s funds are largely privately sourced, coming primarily from Italy’s largest banks. The two biggest banks, Unicredit and Intesa San Paolo,both pledged around a billion euros a piece. A further €500 million was provided by a gaggle of smaller banks and another €500 million was pledged by Cassa Depositi e Prestiti (CDP for short), an almost wholly state-owned financial institution. With a little extra help from certain foreign investors, Atlante was able to claw together some €4.8 billion — to help solve a €360 bad-debt problem.

So far, €1.5 billion of those funds have been used to sub-underwrite the capital expansion and failed IPO of Banco Popolare di Vicenza. Investor demand for BPVi’s new stock was so lackluster that the bank ended up lending money to customers on the proviso that they used some of the funds to buy the bank’s shares, a practice that’s not just deeply unethical; it’s against the law, even in Italy. Yet despite such underhand enticements, the IPO still flopped.

Another €1 billion of Atlante’s funds went into Veneto Banca after its public launch also failed. A further €3.75 billion was used to rescue four smaller banks, Banca Marche, Banca Etruria, CariChieti and CariFerrara in November. The four banks are supposedly now in the process of being sold off to private investors. But just as happened with Veneto Banca, no private investor with an ounce of intelligence will go near them, out of fear that the banks will need further write downs of their problem loans.

Such fears are well-founded. Italy’s banks are caught in the mother of vicious cycles. As long as the economy continues to stagnate, which it’s been doing a good part of the last 20 years, 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, which, despite being rescued last year, is already in dire need of fresh funds. And now the same thing’s happening to the four smaller banks that were rescued in November. On Thursday Reuters reported that the four banks have admitted holding “sofferenze” — or loans to insolvent borrowers — worth some 540 million euros in gross terms at the end of June, up from €156 million six months earlier as loans previously considered as ‘unlikely to pay’ were reclassified as non-performing.

To make matters even worse, on Friday the Luxemburg-based firm behind the two Atlante funds told Reuters that Popolare di Vicenza and Veneto Banca still had unsustainable cost-income ratios despite already being bailed out to the tune of €2.5 billion:

“I say just one thing: one has a cost-income ratio of 103%, the other one of 97%. I don’t know what to say: a bank with such a cost-income ratio cannot stand up,” said Alessandro Penati, chairman of Quaestio Capital Management which runs the privately-financed Atlante fund.

If the Atlante fund doesn’t have enough firepower to steady even Italy’s smallish banks, how is it supposed to help the likes of Monte dei Paschi or Uncredit, each of which has tens of billions of euros of NPLs festering and putrefying on their books?

Just to save MPS, the Italian government and its private-sector partners created Atlante II earlier this year with much smaller contributions from Italy’s “healthier” banks and a much larger contribution from Italy’s government, via state-owned financial intermediaries such as CDP, the Italian Post Office and SGA, a state-owned “bad bank” dating to the collapse of the Banco di Napoli, which offered to put in €450 million.

All this despite the fact that Italy’s government is not even supposed to be allowed to bail out its own banks without first bailing in some bank creditors. Perhaps that’s why news on Thursday that Atlante will be buying up 17% of the embattled lender’s non-performing loan pile for a price of €1.6 billion was met with a wall of stony silence in the country’s general press.

Obviously, €1.6 is not going to be nearly enough to right the ship, especially with JP Morgan Chase’s rescue plan floundering amidst a general atmosphere of disinterest and distrust among shareholders. And what happens when the problems at Unicredit, Italy’s only systemically important financial institution (SIFI), can no longer be ignored?

A much more comprehensive plan with much more public funding will be needed, argues a new Project Syndicate article by Lucrezia Reichlin, a former director of research at the ECB, and Shahin Vallée, a senior economist at Soros Fund Management. One thing they don’t explain is where Italy’s government will get the money for a “much enlarged Atlante fund.”

When Spain’s still beleaguered financial sector was “comprehensively” bailed out in 2011-12, the government had total public debt equivalent to 69% of GDP. In the five years since, that figure has mushroomed by almost a half, to just over 100% of GDP, its highest level since 1912.

Things are already much worse than that in Italy, where the debt-to-GDP ratio, at 132%, among the highest on the planet. As Bloomberg reported this week, if you take away the “underground and illegal economy” component, estimated to be worth €211.3 billion in 2014 and which does not contribute to tax revenues, the debt-to-GDP ratio would surge by a further 20 percentage points to 152%.

Somehow a government that is already crumbling under the sheer weight of its own debt exposure is supposed to bail out a banking sector that, according to some estimates, accounts for well over a third of Europe’s registered bad bank debt. It’s a tall order even at the best of times, and for Italy’s banks these are most certainly not the best of times.

If Italy’s government can’t save the country’s banks (even if it were allowed to), only one institution can. And it is run by a man who’s not only of Italian stock but who, as the governor of the Bank of Italy during the worst years of banking fraud and criminality, bears as much responsibility as any one else in the decadent collapse of Italy’s banking system. By Don Quijones, Raging Bull-Shit.

Meanwhile, the zombification of EU banking system gathers momentum. Read… Reek of Desperation Surrounds EU Banks, Regulators Prepare for “Derivatives Clearing Crisis”

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  27 comments for “Why Italy’s Banking Crisis is Spiraling to Heck

  1. Jonathan Vause
    October 16, 2016 at 10:20 am

    nominal GDP simply has to grow – if it doesn’t (and never mind what happens ‘standard of living’, or ‘economic welfare’, or anything else) absolutely everything else goes to custard. Southern Europe is stuffed as long as it stays in the euro, at what point does the EU elite wake up n smell the reality? ‘there is a lot of ruin in a country’, as someone might have once observed, but at some point what is unsustainable can no longer be sustained, at which point gawd help us (or at least them)

    • Richard of UK
      October 16, 2016 at 11:57 am

      Italy’s economy can not recover whilst Italy remains in the Euro, however, were Italy to exit the Euro then that would be the end of the Euro.

      Catch 22 for the EU authorities and the ‘Project’.

      A Euro II required either without Germany or without Club Med countries.

      • d
        October 17, 2016 at 1:34 am

        Euro II

        Austria, Germany, Estonia, Finland, Latvia, Lithuania, Luxembourg, Cyprus (if it wants to be with Germany again), Possibly Belgium.

        A split like that would be good, and work for both group’s.

        As club-med and its associates could regularly devalue, or separate and devalue, at will. Which is how they kept their economies afloat since 1900.

    • Giuseppe
      October 16, 2016 at 12:52 pm

      Just as during the Subprime crisis… (?!)
      Giuseppe (Italy)

    • Eduardo
      October 17, 2016 at 9:34 am

      The problem is that demographics won’t allow enough growth. This bomb is going to explode. Italy might be the first, but certainly is not the only one with huge problems.

  2. Sound of the Suburbs
    October 16, 2016 at 12:14 pm

    Mario Draghi wants to thin out the European banking system.

    Now, looks like a good time to start.

    Don’t forget DB either.

    • Sound of the Suburbs
      October 16, 2016 at 12:16 pm

      Mario’s current plan.

      Save the bad banks and close down the good ones.

  3. Petunia
    October 16, 2016 at 12:20 pm

    I love a good dead banker story and you left it out of your article.

    Readers, please click on the Raging Bull-Shit link.

  4. Chris
    October 16, 2016 at 12:28 pm

    The Italian banks represent the tip of the spear of the mayhem that is set to unfold. Italy is the 3rd largest economy in the Eurozone and the 8th to 12th largest economy in the world, depending upon on how you measure it. As we know, virtually all money is debt based. As these banks fail credit will dry up overnight. The Italian economy will lock up and the rest of the Eurozone will lock up along with it. It’s not unreasonable to suggest that this credit crunch will spread to the remainder of the western economies. The only way to forestall this requires the infusion of more money, i.e. more debt. What will this debt be secured with? Nothing less the the sovereignty of a nation as its public assets are sold off to creditors. How well received will it be by the citizenry when the Roman Colosseum is sold or perhaps the Eiffel Tower?

  5. Thomas Malthus
    October 16, 2016 at 2:16 pm

    At some point – we will get to see what would have happened if the central banks had failed to act in 2008.

    Of course this time the bubbles are infinitely larger – so we will get Lehman on steroids — and the central banks will be as limp as a 90 year old man.

    The implosion will literally suck the wind out of your lungs.

    There is no way to hedge accordingly other than to save a few rounds for yourself and your family.

    • Kasadour
      October 17, 2016 at 3:16 am

      Saving a few rounds for yourself and family is a way out? I am not trying to be argumentative but is there not a way this can be managed down in a similar way it was managed up? For example a gradual unwind coupled with a gradual reduction in consumption and standards, starting with eliminating overlapping services/goods and recycling or repurposing the superfluous, outdated and outmoded goods and failed or impractical companies, promoting a drastic reduction in meat and dairy consumption for better health, promote manufacturing of new useful items out of repurposed overlapping goods, changing paradigms in personal transportation, enforcing common sense laws.

      Someone questioned in another thread whether this could be the end of civilization as we know it. For awhile, I read these blogs with that in mind; hoping for the end of central banking and all the theft and fraud along with it, not realizing that is what is holding up civilization. Now that the end of central banking upon us, I’m afraid, sick with worry, realizing when central bankers fail, civilization as we know it fails. When this happens many people are going to die.

      In this event, those rounds in our pockets will truly be what saves and consoles us in the end, yet in such a violent and ironic way.

      I fear not for myself only, but for everyone I know. When the crash comes and it will, there is going to be a great equalizing. Ambivalent, I’m left hoping for another kick or two of a central bank can as it takes on weight on a road turning uphill.

      • d
        October 17, 2016 at 4:04 am

        You missed the big one that is a key to this whole thing.

        Population management ,the 1 or 2 child policy globally.

        In places like india and Africa defiantly only 1 child per woman for many generations. Not only do these nations need to reduce their populations to at least WW II levels they need to reduce further to counter the population the have deliberately exported and are still deliberately exporting to the developed nations.

        Do that, and change the Capitalism Model. Away from, consumption, expanding population based, and back to sustainable quality long life products, and yes it can be managed.

        But not when the Globalised Vampire Corporates allied with china and the population explosion nations do not wish to cooperate.

        India still says it can pollute as it wishes, until its per capita pollution levels reaches that of the US. And that nothing can be allowed to stand in the way of indias economic development. A completely unrealistic and untenable position.

        Of course there will be nothing for any human to breathe, long before that pollution output level in india occurs.

        If we want to solve the problem we need to start with attitudes, and population, in, india, Africa, Brazil, and mainland china.

        • Thomas Malthus
          October 17, 2016 at 3:13 pm

          Notice how China just dropped the one child policy?

          They must have been looking at what the long term implications were of a shrinking population — see Japan

        • October 17, 2016 at 3:38 pm

          You don’t need a 1-child policy for a declining population (1.9 would be enough). In most larger developed countries, birth rates are way down – simply because these countries are crowded and expensive and people need to work….

          Japan’s quality of life is quite nice and improving, thank you, because of the declining population. You’ve lived in HK. You know what crowds and tiny apartments are. Same in Japan. Now things get a little roomier.

          Everyone with access to and willingness to use birth control has figured that out. China’s birth rate hasn’t really budged since they relaxed their policies. For that reason. People will be just fine, and when it’s time to have more kids decades down the road, they’ll have more.

          Corporations, oil companies, politicians, and energy doomers-and-gloomers are having a hard time with this concept. But it works great for the PEOPLE of an over-crowded country.

        • d
          October 17, 2016 at 10:28 pm

          I dont think he has the mental capacity for what you suggest wolf.

          I posted to him before I read your reply to him.

          You did a nicer job, as always.

          You clearly have much more tolerance, for his ignorant BS, than I do.

        • d
          October 17, 2016 at 10:25 pm

          “Notice how China just dropped the one child policy? ”

          Notice how its now a 2 children if you must please.

          And some groups, Han in particular, still have1 child restriction’s in some regions.

          They are trying to stay in the 1 -1.3 Billion band. Although they admit they have gender imbalance Issue. They have achieved their objective which was to stop the untenable chinese population explosion.


          You are simply to thick to see it.

          Japan needs long term population reduction, just as china does, for the same reason.

          To recover food self sufficiency. Without reliance on GMO. To reduce population density on the limited livable spaces, to improve quality of life for the population.

          Both nations understand the current world population, with city’s, as jails for the corporate consumers, IS UNTENABLE. And at a minimum, we need a long term reduction to at least pre 1900 levels.

          You are obviously to thick to understand, that over time, a 2 child policy, still gives a slowly declining population.

          These cognitive failures, indicate that perhaps you are really, just a cut and paste of supplied materials, fossil fuel shill, with very limited Cognitive ability’s..

  6. Maximus Minimus
    October 16, 2016 at 4:03 pm

    When it comes to the art of kicking the can down the road, Italy is the winner, but in hot pursuit, there is a gaggle of others including the biggest economy. There must be a caricature somewhere.

  7. NotSoSure
    October 16, 2016 at 8:49 pm

    We need a huge crisis to push the stock market to a new all time high. Imagine a Euro that’s 50% lower. We might actually get Dow 50K.

  8. October 16, 2016 at 11:08 pm

    The Italian government needs to start issuing digital Greenback euros and use them to clean up the country’s rotten balance sheet. If the government would make the pledge to retire 3% of the country’s debt each year over 30 years and cut back on the borrowing the banking ‘problem’ would shrink.

    The corruption in Italian finance has to be addressed directly, this must include an all-out effort to break up the mafias which are responsible for a large percentage of the non-performing loans. They were never intended to be repaid.

    Italy also needs stringent energy conservation. The country shares a problem with much of the rest of Europe: no domestic oil supply. To drive its massive fleet of non-remunerative automobili the Italians must borrow every year tens of billions of a foreign hard currency — euros — that cannot be repaid by driving the cars. What pays is an endless increase in debt.

    That is one heck of a vicious cycle right there … the most viciousest one of all.

    • NotSoSure
      October 17, 2016 at 12:16 pm

      Sure, the Italian government will do all that. Meanwhile, https://en.wikipedia.org/wiki/Organized_crime_in_Italy are still growing and have been growing for a while too. No doubt that should have been taken care of a long time ago as well.

      When will countries do the right thing? The answer is never.

  9. MC
    October 17, 2016 at 9:08 am

    First of all thanks for referencing me. It’s always a pleasure.

    I’d like to spend a couple words now about the Cassa Italiana Previdenza ed Assistenza Geometri (CIPAG).
    Technically it is a private firm performing a public service, in this case paying retired surveyors their pensions when they retire. It’s financed by the surveyors’ welfare payments: don’t get me started about welfare payments in Italy.
    According to the law CIPAG must only invest in low-risk activities both to have funds to discharge its duties and to offer its members other essential financial services. This means investing in a holding dealing exclusively in insolvent banks is deemed a “low-risk activity”. Go figure.

    Locke srl appears to be what is commonly called a “Chinese box” meaning part of a complicated family of holdings that allows whoever is in charge to do so with minimal public exposure and even less financial risks.

    Finally the Salesians. The Vatican’s taste for, let’s be charitable here, financial adventures didn’t die with Roberto Calvi under the Greyfriars Bridge in 1982. But they had grown far more cautious, usually employing complicated ownership patterns which made it impossible for financial institutions closely connected to the Vatican to be held accountable.
    It seems that, given the present Vatican administration is in excellent relationships with the Italian government, they are feeling bolder and have decided to get back into the fray, albeit the choice of the Salesians is puzzling to say the very least.

    Finally one of those snippets of news which are sure to raise your blood pressure a tiny bit: the Italian government is presently considering introducing in the 2017 budget at very least €800 million to be directly handed to banks to stop them from firing people.
    Yes, it’s a drop in the ocean but I am sure it will help the popularity of a government ruling over a country with double digit unemployment figures.

  10. Doreen Petros
    October 17, 2016 at 11:42 am

    My friends, I think the party is over. We need to let this dying, ugly mess just die. We all have caused it. For it was brought to this point by our desires and selfishness.

    If we take a study far back into history where all this mess began (with the clues left here at the end of this article), we can read and see the clear cause of it all: the banking industry itself with the giving of loans, period. Why did it arise? History paints the picture that it was needed to help the poor and thus declared a philanthropic act, although Christianity taught against it. History also says it was a means to give people what they “wanted.” And by so doing through loans with interest money could be made from it. Thus when selfish desire rules all things all things are made possible, and ways were indeed found around the teachings of Christianity. Interestingly, it all started in Italy way back in time and here we have maybe the great undoing start there also.

    To think all of this is going to end comfortably for us when heated selfishness all through time have wreaked families and nations is to live with blinders on. Cause and effect rules our universe and nothing can avert that force; and all signs right now point to the enviable dissolution of this system — the system of selfishness.

    But we can take heart in another truth, that there is only evolution at work here and never an ending. And having seen where selfishness gets us and we can abolish it! First in ourselves, then by seeking a new recovery and renaissance fueled by renewed energy of the heart for a different way of life. One that embraces timeless principles of brotherhood and compassion. Then all of this has served a grand purpose: humanities progress into real civilization.

    • Thomas Malthus
      October 17, 2016 at 2:41 pm

      Koombaya to that!

  11. Chicken
    October 17, 2016 at 12:18 pm

    B/C Italy was ripped off by special interests groups and their corrupt politicians were hired by these elites and fully engaged in the scam.

    The truth is most often the simplest explanation.

  12. Tom Kauser
    October 17, 2016 at 12:19 pm

    How much for Sardinia, Capri and LA Maddalena?

    • d
      October 17, 2016 at 10:37 pm

      They cant sell Sardinia in particular, its autonomous and could return its own Monarch, as they population favor’s this.

      Sicily actually belong to Sardinia, if you get technical.

      Italy is a not particularly tight or old union that could brake up if somebody tried to sell of parts of it

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