All these events conform to a well established script.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Italy’s third largest bank, Monte dei Paschi di Siena, is not insolvent, according to the ECB; it just has “serious liquidity issues.” It’s a line that has already been heard a thousand times, in countless tongues, since some of the world’s largest banks became the world’s biggest public welfare recipients.
In order to address its “liquidity” issues, Monte dei Paschi (MPS) is about to receive a bailout. The Italian Treasury has said it may have to put up around €6.6 billion of taxpayer funds (current or future) to salvage the lender, including €2 billion to compensate around 40,000 retail bond holders.
The rest will come from the forced conversion of the bank’s subordinated bonds into shares. According to the ECB, the total amount needed could reach €8.8 billion, 75% more than the balance sheet shortfall originally estimated by MPS and its thwarted (but nonetheless handsomely rewarded) private-sector rescuers, JP Morgan Chase and Mediobanca.
All these events conform to a well established script. The moment the “competent” authorities (in this case, the ECB and the European Commission) agree that public funds will be needed to prop up an ostensibly private financial institution that is not too big to fail but nonetheless cannot be allowed to fail, the bailout costs inevitably soar.
And this is just the beginning. According to Italy’s Finance Minister Pier Carlo Padoan, the Italian government has already authorized a €20-billion fund to support Italy’s crumbling banking sector, with up to eight regional banks lining up for state handouts. In addition, MPS plans to issue €15 billion of new debt to “restore liquidity” and “boost investor confidence,” as several Italian newspapers reported on today. That debt will be guaranteed by the government and its hapless taxpayers.
As Reuters reports, the guarantees are part of a liquidity scheme for banks in trouble, which the European Commission has kindly agreed to extend for six months. And:
Under EU state aid rules, banks with a capital shortfall cannot benefit from general liquidity support schemes, meaning the Commission takes decisions on a case-by-case basis, as it did for Monte dei Paschi.
According to daily La Repubblica, Monte dei Paschi would issue the debt in the form of bonds and commercial paper. A third of that debt would have a short-term maturity date, while the rest would mature in three years, it added.
With explicit government guarantees underpinning them, the new bonds are magically transformed into an attractive, virtually risk-free (backed implicitly by the ECB) but generous yielding investment.
Once MPS is fully rescued (again), it will, in Padoan’s words, “finally return to operate at full throttle in support of the Italian economy and with the confidence of its savers and employees,” instead of serving as a ten-ton deadweight around its neck.
Arguably the biggest beneficiary of a healthier, taxpayer-supported but not fully nationalized Monte dei Paschi is Italy’s only officially Too-Big-To-Fail bank, Unicredit, which plans to raise an eye-popping €13 billion in new capital in 2017 in what would be Italy’s biggest capital expansion, ever. And not a moment too soon: according to the ECB’s latest stress test, Unicredit has the slimmest capital buffer of all Europe’s Global Systemically Important Banks (G-SIBs).
The bank also has a staggering €80 billion of toxic loans decomposing on its balance sheets — more than any other European bank. Until now the Italian government’s solution to the banking sector’s slow-motion bad debt crisis has been an unmitigated disaster. The two woefully underfunded, deeply opaque bad banks it created to hoover up the worst of the toxic debt off the banks’ balance sheets, Atlante I and Atlante 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.
Yet next year, UniCredit intends to move €17.7 billion of soured debt off its books for securitization and a subsequent sale, none of which would be possible if Italy is gripped by a deepening banking crisis. Unicredit’s new CEO Jean-Paul Mustier more or less admitted as much when he told Bloomberg earlier this month that he was confident MPS’s efforts to raise capital would be “resolved” in December and would have “no impact” on his own bank’s fundraising.
Lo and behold, since December 4, when the prospects of a bailout of MPS took off, following the resignation of Italian premier Matteo Renzi, Unicredit’s stock has soared by 36%.
Another potential major beneficiary of MPS’s bailout are the banks of other European nations, in particular French banks whose total exposure to Italian sovereign and banking debt exceeds €250 billion. German banks are second in line, holding €83 billion of Italian bonds.
Two of France’s biggest banks, Credit Agricole and BNP Paribas, were expected to participate as shareholders in Italy’s two bad banks, Atlante I and II, but they did not “do their part,” as Italian senior banker Giuseppe Guzzetti recalls. Now that the bondholders of MPS and other Italian banks are about to be bailed out by taxpayers, they can expect to be paid back in full, while the generous taxpayers can look forward to years of belt-tightening. By Don Quijones, Raging Bull-Shit.
Over the Christmas holidays when no one was supposed to pay attention, the bailout costs of Monte dei Paschi, third largest bank in Italy, soared 75%! Read… Bank Bailout Balloons, Tab for Italian Banking Crisis Soars