So Who Gets to Pay for Italy’s Banking Crisis?

The answers are beginning to take shape.

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

“There is not and there will not be a banking crisis in Italy, nor will there be a European financial crisis coming from Italy.” Those were the emphatic words of EU Economics Commissioner Pierre Moscovici over the weekend. “We have the capacity to deal with the situation and it will be dealt with from both Italy and at the European level” he told France Info radio.

Clearly, quixotic delusions are as rampant as ever at the loftiest heights of Brussels’ ivory towers. Either that, or things are now so serious that lying is the only tactic left available.

The markets also appear to be in a state of eerie complacence. Since rumors of yet another publicly funded bailout emerged early last week, bank shares have taken off, not only in Italy but across most European markets. Shares of Unicredit, Italy’s only “systemically important financial institution,” has surged 20%, while Italy’s second largest bank, Intesa Sanpaolo, is up 10%.

Once again, just the slightest hint of future government and/or central bank intervention is enough to steady the nerves of today’s welfare-addled investors. For now.

Monte dei Paschi di Siena (MPS), which has already raised capital twice, will have one last chance this week to raise the capital it needs (min: $5 billion) from private investors. Given its abject failure to raise more than €1 billion of new capital over the last six months, despite the assistance of one of the world’s biggest, best connected mega-banks, JP Morgan Chase, it’s a mighty big call. If it does fall short, it will have one last lifeline at its disposal, Plan Z: a full-blown taxpayer-funded bailout, potentially including a bail-in of subordinated bondholders.

The idea of bailing in subordinated bondholders is a touchy subject in Italy, since they include thousands of retail investors to whom the banks “mis-sold” complex financial instruments as safe investments during the lean years of Europe’s sovereign debt crisis. The last time subordinated bondholders were bailed in at a handful of regional banks at the tail end of last year, one retired investor took his own life after losing all his life savings. However, as Reuters’ financial editor, George Hay, points out, the political impact may be overstated:

Over 85% of Italian bail-in instruments are held by the wealthiest 10% of domestic households, according to the Centre for European Policy Studies. If bonds were mis-sold, compensation could be added as needed – as happened in the case of Spanish lender Bankia.

Alas, since Bankia’s taxpayer funded rescue in 2012, the Spanish government, with the funds of Spanish taxpayers, has refunded not only the bank’s retail bondholders but also many of its duped shareholders.

There’s also the prospect of a much broader bailout of Italy’s banking system, which according to “official sources” could total €15 billion. Given that as many as seven mid-sized Italian banks are as, if not more insolvent, as MPS, according to Italy’s Finance Minister, Pier Carlo Padoan, this is the more likely outcome.

However, €15 billion may not be enough. According to Philippe Bodereau, global head of financial research at PIMCO, as much as €40 billion may be needed. It’s an amount that Bodereau believes is both perfectly “manageable” and “not a large number in the context of Italy’s economy.”

It’s worth pointing out he is hardly an impartial bystander in all this. PIMCO almost certainly has some level of exposure to Italian bonds, which would lose a lot of value in the event of a full-blown Italian banking crisis. And it just took control of a fund holding close to €10 billion of impaired assets belonging to Italy’s biggest bank, Unicredit, which today announced plans to raise €13 billion of new capital by the end of March next year.

If successful, it would be one of the biggest capital expansions in Italian history. As CEO Jean-Paul Mustier admits, Unicredit’s ambitious plan would not be helped by a disorderly resolution of MPS. “We are highly confident that the Monte dei Paschi situation will be solved by the end of the year and will not impact our plans,” he said.

PIMCO’s Bordereau points out that the €40 billion bailout he envisions would represent a mere 2% of Italy’s GDP. By contrast, Spain needed a bailout of close to 10% of its GDP to rescue its banks. What Bodereau conveniently fails to mention is that Italy is Europe’s second most indebted government, after Greece. 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 to just over 100% of GDP.

In Italy, the debt-to-GDP ratio is already 132%, among the highest on the planet. Yet thanks to the reality-distorting effects of the European Central Bank’s monetary alchemy, that same government is still able to pay historically low yields on the debt it issues.

But the pressure is rising. Italy’s debt is already near the bottom of investment grade, according to the three big US rating agencies, Moody’s, Fitch’s and S&P and Canadian-based DBRS. If Italy’s credit rating falls into “junk” territory with the four ratings agencies, the ECB would be barred from buying its bonds. This would drive up Italy’s borrowing costs.

In other words, a government that is buckling under the sheer weight of its own debt exposure and whose 2017 budget is already at risk of breaching EU fiscal rules due to excessive spending could be on the verge of bailing out banks that, according to some estimates, have more than €350 billion of toxic debt festering on their balance sheets. And the cost of funding for those banks could be about to explode, begging the ultimate question: How is Italy’s government going to save its banks without pushing itself over the edge?

Turns out, as Reuters reported in an article titled “European Commission Hints at Leeway for Aid on Italy Banks,” European Commission Vice President Valdis Dombrovskis is alleged to have said that any state support for banks was likely to be treated as a “one-off expense”, which would not affect Italy’s official structural deficit measures. In other words, no problem. By Don Quijones, Raging Bull-Shit.

Banks cannot be allowed, at any cost, to suffer the consequences of their own chronic mismanagement, or worse. Read…  The Fix Is Already In, as Italy’s Moment of Truth Beckons

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  23 comments for “So Who Gets to Pay for Italy’s Banking Crisis?

  1. Tom Kauser says:

    Derivatives and strong wine (we can do this)

    We had a big savings and loan crisis last century and history does rhyme!
    IMF and Jamie Dimon destiny awaits! Brother can you spare several billion?
    Need to eliminate the erase marks and we can pull it? (Off)

  2. nhz says:

    “If Italy’s credit rating falls into “junk” territory with the four ratings agencies, the ECB would be barred from buying its bonds. ”

    I don’t doubt for a moment that Mario and his gangsters will find ways to get around this. And does it matter as long as all the other banks with their free ECB money can buy the bonds, and know that the ECB will save them whatever the cost?

    Anyway, the easiest solution for Italy is adding it all to the tab, the Target2 balance; most ClubMed countries need another huge bailout next year anyway. So in the end, it is probably the taxpayers of Germany, and to a smaller extent a few other countries like Netherlands and Finland, that are going to pay for all the sins in the south.

    Despite the public debt, Italy is a very wealthy country (per citizen one of the most wealthiest in Europe, FAR above Germany!) but much of that wealth is in real estate, Swiss bank accounts and other means that are not the easiest for politicians to grab. Politicians prefer easy solutions ;-(

  3. rich says:

    An example of banking, Italian style:

    “Desperate, Mr. Rossi tried another bank, Veneto Banca. Its bankers were prepared to extend a loan — with one major catch.

    “They said, ‘You need €300,000. We are prepared to give you €600,000,’” Mr. Rossi recalled. “‘But you have to take the extra €300,000 and buy the bank’s stock.’”

    That would have doubled his payments while placing a sizable bet on a dicey bank. If it failed, he would still be responsible for the loan. This seemed dangerous and unsavory.

    “The next step is the Mafia,” Mr. Rossi said.

    His reluctance was ultimately validated. This summer, as Veneto Banca teetered toward collapse and was eventually bailed out by a private investment fund, depositors yanked money out of branches and shareholders’ savings were wiped out. In August, the Italian authorities arrested a former chief executive of the bank on allegations that the bank had lent customers cash so they could buy company shares.”

    • MC says:

      Small correction: Veneto Banca has not been bailed out. It’s on life support until somebody figures out what to do with it.
      At the moment (as of last week) the favored solution is a fusion between Veneto Banca and Banca Popolare di Vicenza. While on paper this is a no brainer (both banks are effectively controlled by the shady Atlante fund), there are two issues.
      The first is 2500 bank workers would lose their jobs. While on paper it doesn’t sound like much, these jobs are concentrated in a relatively small area and in Italy firing bank workers in Italy is always expensive, as a severance package proportional to the number of years worked in the banking sector is required.
      The second is the new bank would require €2 billion in fresh capital just to get started. Atlante is already running on fumes and, regardless of what ivory tower intellectuals think, there is no appetite for recapitalizing banks throughout Europe at the moment.

      Here I’d like to ask a question to the brilliant minds working for PIMCO and similar outfits: if raising €2 billion in fresh capital for what’s officially a “good bank” is proving so hard, how do they expect MPS to raise the far larger sum they need?
      No, a taxpayer-funded bailout is not an option: unless a way is found to recapitalize MPS by conjuring the money out of thin air, doing so means the new Italian government can just hand over the keys to to the country to M5S and save itself the trouble.

      • rich says:

        “No, a taxpayer-funded bailout is not an option: unless a way is found to recapitalize MPS by conjuring the money out of thin air”

        That’s what happened after 2008. The taxpayers didn’t bailout the TBTF banks with $700 billion in TARP money, the Fed bailed them out by making over $29 trillion available to them. That was money created out of thin air.

        • Tom kauser says:

          Oh so close!
          Hank Paulson stole the money and instead of using it to invest in banks bonds he handed the check to the fed?
          The fed got the asset and treasury got warrants (banks made 25 trillion) and everybody got a new mission statement!

        • MC says:

          2008 was one of those watershed events that changed a lot of things, but only get recognized as such after some time has passed and the dust has settled.

          One of the things that changed is the old “this bailout is needed for the greater good” hand was massively overplayed throughout the world. Whatever store of goodwill that existed has been expended to allow payment of bonuses and dividends to continue without a hitch.

          Of course now I’ll get to hear what I’ve been hearing for years, namely that all opposition is controlled, that “elites” control everything and are omnipotent… I used to be in UFOlogy and I’ve heard enough conspiracy theories to last me for a few lifetimes so I am immune to it.

          Regardless, the big problem right now is not just all those so called “populist” political movements (presumably funded by those Russian hackers so popular these days… again, been there, heard that). The big problem is those “populists” are just the warning shot fired across the bow, very much like Tupac Amaru II’s rebellion against the Spaniards was just the prelude to the Bolivarian uprisings.
          The Spaniards felt safe enough after the great native leader was brutally executed and tens of thousand of his followers killed, but they were just delaying the inevitable.
          As Ludwig Von Mises rightly said “A government, no matter how brutal, cannot last long without at very least the silent consent of the governed”.

        • Tim says:

          Well, MC, at some point it became apparent that food was a key factor, when the food runs out, then things get disorderly, as they say in the markets.

  4. Me says:

    There really IS NOT a problem. The EU only needs to purchase the bonds, or even stock, or the credit lines, owned by this, or ANY other bank in Europe.

    There is unlimited “credit” available from the EU banks and can be issued to any bank, any time, for any amount. This is what is so good about our modern banking and “monetary” system. No bank ever needs to fail. Ever.

    With today’s sophisticated, modern banking, this can be done. We are no longer tied to a “barbaric” metal. We are beyond and above a “barbaric” metal that limits man’s achievements.

    Just issue this bank what ever credits they need, and there will be NO problems with this bank’s standing.

    I fail to see any “problem”, unless the leaders of Europe are concerned about the stupid peasant People.

    • HD says:

      Irony, nice, I always love it. That is indeed the problem, isn’t it? That there will always be jokers at the top claiming “this time it’s different, we got this, we’ve evolved in our credit system, Newton’s laws do no longer apply, let alone common sense”.
      I stopped warning people close to me a couple of years ago, because I thought the credit system would have imploded by now and that thoroughly discredited my message. But the end result? It’s not going to be pretty, whichever way you slice it.

  5. Intosh says:

    “If Italy’s credit rating falls into “junk” territory with the four ratings agencies, the ECB would be barred from buying its bonds.”

    It’s just a game — they can rewrite the rules any way they want. Example:

    “European Commission Vice President Valdis Dombrovskis is alleged to have said that any state support for banks was likely to be treated as a “one-off expense”, which would not affect Italy’s official structural deficit measures.”

  6. Gee says:

    Welcome to the world of infinite Ponzi.

  7. TheDona says:

    Here is the latest on UniCredit:

    Lay off 11% of workforce, Close one fourth of branches, and use Record Rights Issue to extort the shareholders to keep it propped up.

    • nhz says:

      let’s hope this is the 11% that is never reporting for work, as seems to be common in many Italian government agencies ;-)

  8. rich says:

    There could be a major international bank consolidation looming in the future, similar to what we saw after 2008. Weaker hands fold and the stronger hands take the pot. Crony capitalism is a winner-take-all game.

  9. mynamett says:

    No major banks in western countries will be allow to failed. They will bail them out, hide bad asset on off balance and so on. They will print money if needed. Almost every CB bank is printing money. BoJ is printing and pumping Nikkei 225 up. ECB is printing money and pumping Europe stock market up.

    There is so much money floating around in the hands of big financial institutions that it is starting to show up in the price of oil, real estate and stock market.

    Where can this money go, if western countries don’t build or manufacture anything. It can only go into fake wealth creation such as stock market bubble, real estate bubble, oil price bubble.

    Expect the down to gain 200 point no matter what she says or does.

    • NotSoSure says:

      +1. The only hope for change is Erdogan and the refugee horde. Only that can initiate the true change.

      Western nations and its citizens are all corrupt and can’t be counted on to do anything right anymore.

      • nhz says:

        Today the Dutch government’s fake news propaganda TV channel was reporting how the economy of Turkey is in shambles due to the plunging Lira. Strange, because for many months they have been explaining how the plunging euro currency – thanks to Mario and his mob – is good for EU citizens.

        On another note, the Dutch economy is back to its GDP of 2008, life it good! And this GDP improvement is due to … more people buying new houses!!! Who would have thought … The stawk market keeps going up too, life is good … people who think that there are economic problems in Europe are not paying attention ;-)

    • Dan Romig says:

      There is some manufacturing in Europe; cars in Germany for example, and I would guess the devalued euro helps the automakers. Europe also has agriculture and other endeavors that actually make tangible products. However, fake wealth creation, which the banking cartel has pushed beyond its limits needs to be left to free-market forces.

      rich is spot on in his assessment of 2008 and TARP, and TPTB are playing a game of chicken with the masses. Damn it, if the banks go under, so be it! Depositors need to be protected as we are promised to be in the US with FDIC, but shareholders and bondholders do not deserve one freaking penny from the average working citizens’ tax coffers.

      Am I wrong Don, Wolf and readers? We are told the sky will fall if we let these poor, corrupt, cheating financial institutions go under, but the sun will still rise in the east in the next morning if we do, I reckon.

      • Frederick says:

        They should have been left to their own devices in 2009 after causing the crisis Dan in my opinion

  10. Vichy Chicago says:

    To quote from TBS’ “People of Earth”:
    Don’t get weird, okay?

  11. Andrew Kelly says:

    Don Quijones and Wolf Richter;
    I like your writing, your tone and expressions. Both of you have a gift for writing, and I imagine all of us fans would like to write the same way too.

  12. d says:

    This is not 2008.

    If Brussels the Italian Govt and The ECB do this. Without a full bail in first.

    They will pay for it and they will not like the price.

    There are ground to protect the bondholders who were miss-sold bonds but only those holders of miss-sold MDP bonds.

Comments are closed.