Italy’s Crisis Turns into a Multi-Headed Hydra

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Making Retail Investors pay.

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

Bank stocks have surged just about everywhere since Trump’s election, with one exception: Italy. In the last month only one large Italian bank has seen its shares rise, and that’s the 500-year old bank at the center of Italy’s banking crisis, Monte dei Paschi di Siena, whose nearly worthless shares jumped to €0.24.

All the Wrong Signals

Shares of Italy’s other large banks have suffered heavy losses. Over the past week alone, shares of Italy’s largest bank, Unicredit, plunged 15%, as did the shares of Banca Popular and UBI Banca. Shares of Italy’s second largest bank, Intesa Sanpaolo, fell just under 10%.

The recent losses compound what’s been a miserable year for Italy’s banking stocks. The best performing stock is the investment bank Mediobanca, which is down a mere 24% for 2016. During the same period, Unicredit has shed over 60%, UBI Banca 65%, Banco Popolare 80%, and Monte dei Paschi 85%.

It’s not just banks’ shares that are flashing all the wrong signals. UniCredit’s five-year credit default swap surged to 221.2 basis points on Friday, meaning it now costs €221,200 to insure €10 million of UniCredit’s debt against default over five years.

A Multi-Headed Hydra

As with all major crises, Italy’s current predicament is a multi-headed hydra. It’s a banking crisis, an economic crisis, a debt crisis, and a political crisis all rolled into one, and all coming to a head at the same time.

Italy’s economy has been in reverse ever since it joined the euro 17 years ago. Since 2007, its GDP has shrunk by a staggering 10%. In the meantime its public debt has continued to grow, reaching 135% of GDP today, the highest level of any Eurozone country with the exception of Greece. And now the yield on Italy’s 10-year bond is on the rise, hitting 2.09% on Friday in a NIRP world, its highest point in over 13 months.

Investors are worried about two things: the very real prospect of a government defeat in the upcoming referendum on constitutional reforms (a subject I covered last week) and Italy’s blossoming banking crisis.

The government’s solution to that crisis has been to create two woefully underfunded, deeply opaque bad banks — Atlante I and Atlante II — whose job it’s been to hoover up the worst of the toxic debt off the banks’ balance sheets. Atlante I and II don’t have enough firepower to steady even Italy’s smallish regional banks, like Veneto Banca, which keep coming back for more handouts, let alone the likes of Monte dei Paschi or Uncredit, each of which has tens of billions of euros of nonperforming loans (NPLs) festering on their books.




Two weeks ago when Giuseppe Guzzetti, a senior Italian banker who helped create the two bad banks, admitted that after six months of frenzied activity Atlante II is already “out of breath.”

Meanwhile, JP Morgan Chase’s last-ditch rescue of Monte dei Paschi continues to flounder, as shareholders who have already lost €8 billion in two previous capital expansions seem strangely reluctant to provide the bank with another €5 billion in fresh capital. That has left MPS and its handsomely compensated rescuers little choice but to unveil Plan Y this week, which essentially involves offering holders of the bank’s subordinate bonds a debt-for-equity swap.

Making Retail Investors Pay

Debt-for-equity swaps are a feature of debt restructuring. Put simply, for MPS to restructure its debts, the current owners will have to be diluted or wiped out. To all intents and purposes that has already happened, as MPS’s stock price has barrel-bombed from over €10 in early 2013 to €0.24 today — a 98% decline.

As for the bank’s creditors, they’re invited to become new owners of the reborn entity, by trading in roughly €5 billion worth of subordinate bonds at remarkably generous terms — 85% of face value for those holding junior tier 1 debt and 100% for those with slightly less junior tier 2 bonds — in return for one billion euro’s worth of equity. It’s a shitty deal and there’s no telling just high or low that equity will go, but it’s probably the best they’ll get.

Normally, subordinate debt is the sole preserve of sophisticated investors. But not in Italy. Almost half of Italian banks’ subordinate bonds are owned by retail investors, a dark legacy of banks using their customers as a piggy bank for cheap funding. Put simply, misselling subordinated debt to unsuspecting depositors was “the way they recapitalized the banking system,” as Jim Millstein, the U.S. Treasury official who led the restructuring of U.S. banks after the financial crisis, told Bloomberg earlier this year.

Now some of those retail investors, many of whom are traditional voters of Matteo Renzi’s centre-left party, are on the verge of being bailed in. It’s Renzi’s worst nightmare, at the worst possible time: the swap scheduled to take place on Nov 28, just 6 days before referendum day.

A Classic Prisoner’s Dilemma

An even greater danger is that the swap fails, as individual bondholders decline to participate in the hopes that other bondholders do, leaving them with a safer bond, rather than iffy equity, in a recapitalized bank that still pays a juicy interest rate. As the Wall Street Journal points out, it’s a classic prisoner’s dilemma. If the swap fails, the EU’s bail-in rules will probably kick in, including the forced conversion of subordinate bonds.

In such an event, the risk of contagion cannot be overstated. Many of Italy’s other banks face very similar problems to MPS. They include Unicredit, the country’s sole global systemically important bank (G-SIB), which hopes to dump tens of billions of euros worth of impaired assets in the coming months as well as raise €10-13 billion in new capital from investors, over double the amount that MPS has spectacularly failed to muster. By Don Quijones, Raging Bull-Shit.

Italy is in the middle of a blossoming banking crisis, and now this. Read…  The Global “Populist” Doom Tour Swings to Italy




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  33 comments for “Italy’s Crisis Turns into a Multi-Headed Hydra

  1. subunit
    November 20, 2016 at 2:36 am

    Next: Legislate the mandatory purchase of subordinate bonds by all citizens. If you have children you have to buy for them too. If you don’t, massive fine which is used to purchase subordinate bonds on your behalf. Ban all cash. Government debts are extinguishable only with the bonds of Recognised Banks. Employers are required to denominate payrolls in bank bonds. Failure to deal solely in bank bonds will result in a hard labour penal sentence on a Goldman Sachs or Agricultural Bank of China commune and reeducation.

    • Trippytaka
      November 20, 2016 at 8:27 am

      It’s a long shot, but it might just work. We can raise extra funds by turning those people into Soylent Green.

      • Mel
        November 20, 2016 at 11:26 am

        Good. We have all this Soylent Green. But where are the customers?

    • Kasadour
      November 20, 2016 at 9:37 am

      Why should the citizens have to work to pay off the misallocation of funds (right into the bankers’ pockets) to support these private institutions? And there is ZERO accountability. isn’t that a form of slavery? For the love of gawd. . .

      • Jungle Jim
        November 20, 2016 at 11:13 am

        You must be new here ! They can’t just admit that they failed……. That would be a terrible precedent. The elites would look bad, the euro might collapse. Impossible, unthinkable……. The people must be sacrificed. sarc/

        • Kasadour
          November 20, 2016 at 4:11 pm

          Kinda. I’ve been reading regularly since this was called testosterone pit and finally felt compelled to start commenting about five months ago.

        • November 20, 2016 at 7:50 pm

          Glad you finally came out of hiding :-)

      • subunit
        November 20, 2016 at 12:06 pm

        I am not actually advocating for a totalitarian system run on behalf of the banks. I don’t work for one.

    • milking institute
      November 20, 2016 at 7:08 pm

      Perhaps the Obama care mandate was just a test case for how much the public can be pushed around and yes “the war on cash” is on our door step (see india,scandinavia etc) the ultimate and final control of the unruly masses. i can see the headlines, “congress in talks to institute a 5% levy on every citizens digital account to save the banking system” this MUST be done or else the economy faces catastrophic collapse,you know.. sounds familiar?

  2. d
    November 20, 2016 at 5:34 am

    The purpose of the Euro was not to turn France and its club med buddies into third world nation’s.

    Time to split with france Greece and the rest of club med in 1 currency, and the rest in another.

    Cyprus should get an election, as it is no longer an indebted banking system club med state.

    Otherwise the whole thing is going to go down the drain with Italy.

    It is obvious to all, except those in Brussels, that Brussels has politically overreached in these constrained times.

    Time for a new grand bargain, which keeps England in the Eu, and the Eu policy’s on immigration and benefits, which are not working, changed. So that people to move to job’s, they have applied for and have been offered, whilst still in their home nation. Not go to England/Germany and steal somebody else job, by undercutting rates and condition’s. Or go to England become a big issue seller, claim housing benefits then rent out the other rooms in the house to other immigrants from your home nation, who are looking to steal English peoples job’s.

    Benefits should be citizenship concentric, If you are not a citizen, or long term, taxpaying permanent resident of the country. No benefit, no exception.

  3. Kevin Beck
    November 20, 2016 at 9:01 am

    Atlante II is “out of breath”?

    How about, Italy is out of their collective minds.

    Europe has reached the point where the criminals are really in charge of the jails AND the insane asylums; they just haven’t gone through the formal procedure of changing the names of their government-occupied buildings yet.

    The whole ideas of fractional reserve lending and legal tender are what’s on trial here, not capitalism or free-market principles. Every one of these so-called fixes has been implemented by governments, not by the markets. Nothing like this could have happened without those two ideas being in place.

    As J P Morgan (the banker, not the current monster-bank that bears his name) said, “Character of the borrower must be judged by the lender.” What we are witnessing is the character of the failed institutions being put on full display for the world to see, and the picture isn’t pretty. When the banker can initiate the loans that imperil the bank’s balance sheet, does the banker get punished by the bank when the loan fails? NO! Instead, the bank gets propped up the government lackeys, and the depositors get punished. The depositors do not have direct influence upon what loans the bank makes with what used to be their money.

    This whole sordid episode shows why banking and government have to be separated, and legal tender laws need repealed worldwide.

    • Kasadour
      November 20, 2016 at 9:47 am

      This^^^

    • Meme Imfurst
      November 20, 2016 at 2:01 pm

      Italy’s economy has been in reverse ever since it joined the euro 17 years ago. Since 2007, its GDP has shrunk by a staggering 10%. In the meantime its public debt has continued to grow, reaching 135% of GDP today, the highest level of any Eurozone country with the exception of Greece

      Good point, but the GLOBALIST must be put down, it does not work and never can. Without Goldman at the steering wheel, NONE of these countries would have met the economic criteria…NONE. It is all another FRAUD coming home to haunt. And who gets off scott free? Goldman.

      Banks and Government heads no longer work for the country or the citizens, they work for each other.

    • NotSoSure
      November 20, 2016 at 4:24 pm

      I am not even sure why depositors have to be bailed in. Because what’s lent is not their money anyways. Anyone still believing in the primary school economics of Person A depositing money in Bank B which then lends it out should get a failing grade.

      http://www.bankofengland.co.uk/research/Documents/workingpapers/2015/wp529.pdf

    • Dan Romig
      November 21, 2016 at 6:40 am

      In 1912, the year prior to the Federal Reserve being established in the USA, J P Morgan testified before a Congressional hearing. He stated, “Gold is money. Everything else is credit.” Quite prophetic words, eh?

      Today, “When the banker can initiate loans that imperil the bank’s balance sheet, …”, the bank packages up the loans and resells them. These get kicked around a bit and insured with credit default swaps, and lo and behold, they become essentially just a Ponzi scheme.

      Don, I love your writing style, ” … each of which has tens of billions of euros of nonperforming loans (NPLs) festering on their books.” Thank you Don and Wolf for reporting the truth.

  4. NoRush
    November 20, 2016 at 9:07 am

    Subunit – wouldn’t it be easier to require government taxes to be paid in bank bonds? The English model of taxes seems to force compliance and participation quite well.

  5. Kasadour
    November 20, 2016 at 9:28 am

    Put simply, misselling subordinated debt to unsuspecting depositors was “the way they recapitalized the banking system,”

    I think he got it right the first time. It’s using the public as a piggy bank. In other words theft out right. These bankers should be arrested, prosecuted, convicted and punished which includes resititution. Sell off the homes, vacations homes, cars, boats, jeweler, designer clothing. Strip them of everything they have! :-[

  6. November 20, 2016 at 10:21 am

    A wag once asked the Jewish philosopher Hillel to condense the message of the Torah while standing on one foot.

    “Treat others as you would have them treat you, the rest is commentary.”

    Describing the world banking/finance crisis while standing on one foot:

    “People live beyond their means until they can’t, the rest is lies and coercion.”

    • economicminor
      November 20, 2016 at 12:21 pm

      “People live beyond their means until they can’t, the rest is lies and coercion.”

      If it were only that simple. People were coerced/conned into using debt to maintain the lifestyles they believed they deserved while those with special privileges were allowed to plunder.

      Madison Ave used the most educated psychiatrists to devise methods to encourage people show off to their neighbors and unsophisticated people fell for the bs. All the while the Banksters who had been buying Washington DC for years put themselves above the Nation. Greed was propagandized as good and sold as Gods work..

      Here in the US and in Europe. Especially along the Mediterranean where life was apparently to easy and people to easily fooled.

      So Sad!

  7. Yoshua
    November 20, 2016 at 10:26 am

    Greek banks, Portuguese banks, Spanish banks and now Italian banks are going banco rotto.

    The same bankers work in these nations? The bankers should be punished? The banks lend to the economy and the economy fails. Perhaps the economy should be punished as well?

    These banks are very old and have survived many crisis on their path… but not this crisis. This crisis is something else and it will kill them.

    • DV
      November 21, 2016 at 6:53 am

      German and Austrian banks look wobbly too. No doubt most of them will go under in a situation of stress. Maybe even ealrier, if Draghi keeps zero or negative interests rates. He promised to keep printing no matter what. But trillion or so Euros is nowhere near enough to clear the overhang of debt.

      But this is not the point. Why did this happen in the first place? This is what happens when you put politics ahead of economics.
      I am just back from Italy. Looking at tourist crowds in Rome you would hardly expect the country to be in a such a predicament. And prices in Rome are somewhat on the high side too. But it is. The same goes for Greece. I would guess that this has to do with the ill-conceived eastward expansion, then, of course, Euro, and political advanturism prevailing in the EU overall. Who is to thank? Of the remaning political figures, Frau Merkel, of course. She has been around all this time and was key to shaping those policies.

      Now someone will have to pay for that! Greece was promised debt relief. So German taxpayers will need to pick up the check, mostly. And you know what – Merkel is going for the 4th term in office!

      • d
        November 21, 2016 at 7:44 am

        Mutti goes for 4 and with the afd in the background Germany, wont be picking up the tab, for anything.

        Right wing Maniacs have their uses.

        Before then the froglings have a turn.

        Lets see where the FN finishes.

      • Doug
        November 21, 2016 at 10:17 am

        I was in Rome last December and did not find prices to be bad . I would say Rome in some cases was even cheaper than the U.S., at the time it was 1.10 for a Euro now even cheaper at 1.06

  8. NotSoSure
    November 20, 2016 at 10:40 am

    In the new world we live in, it’s not a crisis until there’s a revolution.

  9. Lolo Gecko
    November 20, 2016 at 11:34 am

    … easier to … raise Titanic than … that dog ….

  10. nick kelly
    November 20, 2016 at 11:35 am

    All they have to do is elect Brillo, their Trump, cancel all trade pacts leave the euro and everything will come up roses.

    Or lilies.

    • Edward E
      November 20, 2016 at 12:46 pm

      The angry former middle class people will do it too! Why vote for the elites that they rightfully hate for lowering their status to poor? Crash it…

  11. Tom Kauser
    November 20, 2016 at 11:44 am

    Resolution trust fund
    Jim baker
    The Keating five
    The pope
    Who said the world is out of ideas?

  12. Ishkabibble
    November 20, 2016 at 3:20 pm

    There is no better, simpler way to send a message of “no confidence” in whatever you want to call the present economic system than by withdrawing, as cash, as much digital money as possible from banks and investments, and using that cash as much as possible in all transactions.

    Especially in the present fractional-reserve banking system, dong this bone-simple thing will send a strong, unmistakable message to the Elite that they cannot ignore — that people do not want an Elite “managing” their daily lives.

    Folks, you must exercise what little freedom and power you have left, or you will lose it. Also keep in mind that it’s first come, first served in the ATM or bank-teller lines.

  13. Anon
    November 20, 2016 at 8:15 pm

    It seems that Italy had fewer problems when it used its own currency (the Lire) and devalued it every few years to make up for all of its corruption. With the Euro, it has lost that flexibility. There is a big cultural difference between the Germans and southern Italians.

    • nick kelly
      November 20, 2016 at 9:12 pm

      This devaluing only works so long- Zimbabwe was just the most recent place to devalue its currency to nothing. The last note was billion or more, but it still wouldn’t buy anything. They now use the $US.
      Argentina has abandoned at least one currency.
      I believe that even when Italy still had the lira most real estate was priced in US$.
      The fundamental problem with constant devaluations is that the currency loses one of the requirements of a currency- to be a store of value.
      BTW: I’m not just a spectator. When I sold my house in Aug.2014 for C$ the bank asked if I wanted a US$ account. Then the C$ was 85, now its 73.50
      So I’ve lost about 15%.
      Sure it’s great for exports, US tourists etc. but as a store of value, not so much.

      If I’d gone into silver in 2014 I think I’d be up about 25% against today’s C$ but I’m not 100 % sure about that.

      Oh well it’s up against the Mexican peso.

  14. shaba
    November 20, 2016 at 11:50 pm

    good question to ask is why are French / Italian banks so full of toxic debt?

    I have read that pre Euro they could get >10-15% on their own govt bonds, but post Euro everything flattened to basically be ‘Germany’, so they just ramped up the amounts & leverage to try and maintain profits….never worrying about how to unload if bonds ever went back to being priced like individual countries and not as EU zone

    • d
      November 21, 2016 at 12:13 am

      The entire Club-med banking system is riddled with fraudsters, crony capitalists, and corrupt bank employees.

      The banks for years, did not try to collect on the NPL’S, as they knew there were no, or worthless assets behind them. They could do this, and get away with it until the euro and GF crisis, caused by greece.

      Italy and Spain in particular have been kicking this can since the greek crisis their banking systems could not withstand the losses, caused by their exposure to greece. The full force of those losses did not in many cases, come for years after the event.

      Draggi has done a great job protecting the Club-Med bank’s, at the European citizens outside Club-Med and the Germany taxpayer’s, expense, but it is coming to an end.

      As the zombie company’s living on the NPL’S, are simply killing everything that could again become healthy, if the zombies were allowed to die.

      Allowing the zombies to die, will however takeout a large segment of draggis crony corrupt Club-med banking system.

      So now due to draggis can kicking, the mess will be even larger than it would have been when he took office. As more and more healthy entity’s have been starved by the Zombies.

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