Who Exactly Benefits from Italy’s Ballooning Bank Bailout?

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

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  40 comments for “Who Exactly Benefits from Italy’s Ballooning Bank Bailout?

  1. George McDuffee says:

    All good things come to an end, including “extend and pretend” financing. Motto: But it seemed like such a good idea at the time…

  2. Raymond Rogers says:

    You would think given our recent troubles, that governments everywhere would deem anything “to big to fail” a monopoly on the state, and subsequently broken up into smallet pieces (this would create jobs by the way, and mitigate risk).

    It’s amazing that we tolerate these financial threats. They have the capability to do the country more damage then most of our enemies.

    • Maximus Minimus says:

      They should be treated like utility companies which they are with strict guidelines for renumeration. The investment banking casinos should be broken up like you said. The two should never come close to each other.
      But since they run the system now it will require a revolution.

      • Raymond Rogers says:

        We don’t need that extent of control. I’m tired of governments owning everything and telling companies HOW to run their business. Do we really want a model like Japan or Europe where the government owns all the companies, yet still conditions are bad.

        All suggested was not to allow companies so much of a market that they have the capability to crash the market.

        • interesting says:

          “where the government owns all the companies”

          unlike the USA where the companies (banks) owns the government.

  3. John Doyle says:

    As long as Italy bucks the EU rules about spending it can solve the banking problem. Just as “our mate” Bernanke paid for the GFC bank bailouts, Italy has to ignore the rules and simply write up numbers from thin air into the reserve accounts. The EU will find they cannot countermand it simply because they won’t want to show themselves up , so the’ll let it go through with a few quiet words on the side. And Italy can continue to ignore them.
    Either that or crash the whole rickety edifice!

    • It’s a good idea but the government has to grow a pair and be ready to take on the banking cartel.

      The problem is Italy (like Greece) really has no government, only a roiling mob of middle aged, well dressed men.

      • Si says:

        Italy is not the only problem. The ‘revolving door’ means that those in government have very close ties to those who have their pockets open for handouts.

        Funny that welfare is largely for the rich.

      • Frederick says:

        Not going to happen as long as our government is occupied by greedy sellout traitors such as the lovely Clinton mafia family and people like George Soros are allowed free reign

  4. Petunia says:

    Very likely the open interest on the CDS is huge on this bank and any default will trigger an avalanche of defaults throughout the entire banking system. As long as they are allowed to sell CDS no bank can be allowed to default. They will extend and pretend.

  5. bob says:

    So what happens with the toxic debt – does it get slowly written off the books quietly with no consequences for the debtors? If so, the debts I owe could soon become toxic.

  6. NotSoSure says:

    The citizens of Italy are benefiting for sure. Imagine if the Italian government were to force the Lira on them before XMas or borrowed the Modi playbook.

    The citizens of Southern Europe are also benefiting from this extend and pretend. All of them could have experienced a Greek style XMas, but nah.

    • Chicken says:

      The EU has no taxation power, who guarantees the debt?

      • NotSoSure says:

        You think the little people care? Certainly the big people don’t care.

        As usual though, the answer to your question is the people. It’s true then, it’s true now, it’s true forever.

  7. Chicken says:

    Prepare to transfer public wealth to the criminal enterprises. There’s no media coverup, no indeed.

  8. It looks like the road that can has been kicked down for so long has come to a cul-de-sac.

    (“You offered the great idea of the MPS being taken over by the Bank of Italy and basically sold in pieces to the ECB … “)

    (That was a joke. Instead, the taxpayers and depositors in Italy will be sold to the MPS banking executives and secured lenders. If they are lucky they won’t have to be sex slaves.)

    (“That’s cruel.”)

    (Not as cruel as when these zombies finally crash. Target2 will fail and German taxpayers and depositors will be sold to the banking execs and secured lenders. I doubt the Germans are ready to be sex slaves. There is the medium bank runs already underway in Italy, there will be the Mother Of All Runs by German banks out of the euro. Bank failure in Italy is ultimately failure of the euro itself.)

    • NotSoSure says:

      LOL. People waiting for the end of Italy and the Euro or what have you will wait for a LOOOONG time. The muppets will make sure that the system will be extended and pretended just like in Greece.

      Either way, a new government will get a visit from Ndrangheta or what have you if they were to make a change that will hurt their interest. Beppo the Clown vs Ndrangheta. I wonder what the line is in Vegas for that match.

      • ANON says:

        They will certainly try. What is different this time is that fuses are running short just about everywhere, both literally and figuratively, as the news and the comments on blogs and social media seem to suggest. One big default on the promises of the current narrative (which is already being questioned, even by the less inquisitive), is all it takes.

      • mynamett says:

        I agree nothing will happen. They will print the money and dump the bad asset onto ECB balance sheet.

        Remember Deutsche Bank’s $47 Trillion Derivatives Book that was supposed to collapse the whole financial system because of intertwine debts. Nothing happen because ECB took the bad asset and printed the money.

        Personally I expect inflation to pick-up. I am watching the oil price as an indicator that inflation could be coming.

  9. michael engel says:

    -The bible say : debt forgiveness jubilee but, Italy isn’t there yet.
    -Italy is very important. They have seria A ; they have a boot
    on the neck of the Mediterranean sea ; more US bases than
    any other EU country. A midsize GDP.
    -So, they will kick the can down, like Greece.
    -Greece chose not to write off debt and staying in a zombie state.
    -The ECB will allow debt to pile on and swap into much higher
    degree, if they provide a good collateral.
    -The island of Crete is the best. Can’t ask for much better view.
    On a good weather day you can look @ the sea of Marmara, Latakia,Haifa and Port Said. Not bad at all !!
    -If Alexis Santa Anex will provide that, the sky is the limit. He can
    go for half a trillion $, or even a cool 3/4 trillions. Who cares, it’s
    only banking assets. It can expand and contract @ will.

  10. MC says:

    Hidden under the mountain of €360 billion in NPL’s, there’s another story which I wind far more interesting.

    Back in 2010, French banks had by far the largest exposure to Greek sovereign and banking debt, at €52 billion, or twice as much as German banks. Right now their exposure is under €8 billion.
    Allowing Greece to have the cake and eat it too (at tremendous cost for the population but not so much for the Leftist corner cafe orators running the country even further into the ground) was effectively a massive bailout of the French banking system to which the French government contributed little more than pennies, or about €7 billion.
    The rest was generously provided the Italian and Spanish governments, which saw their exposure to Greek sovereign and banking debt increase by €32 and €23 billion respectively.
    The French banking system is presently exposed to Italian sovereign and banking debt for a dizzying €250 billion and counting: as the saying goes the wolf loses the hair, not the vice.

    Here I’d like to remind France is home to four Global Systemically Important Banks (by contrast Germany and Italy have a single one each): BNP-Paribas, BPCE, Société Générale and Crédit Agricole.
    Why does France have so many G-SIB’s relative to the size of her economy? China, a far larger economy than France, has the same number.
    The answer lays in the deep and unsolvable tangle between State and corporation in France, which takes forms different from those other countries are accustomed to.
    While the four Chinese G-SIB’s are all State-owned, end of story, the French G-SIB’s have that mixed public-private pattern of control (not merely ownership) that has long been the bane of the French economy and politics.
    To borrow a page from US history, the relationship between the French State and the largest French corporations (financial or otherwise) is a whole lot like the relationship between the CIA and Howard Hughes: you don’t know where one ends and the other begins.

    I have no doubt France, Europe’s only political heavy hitter (Germany is an economic giant but a political gnome, even more so than Japan), is using her considerable influence inside the EU to arrange for yet another backdoor bailout of her banking system.
    To this it must be added France has always exerted a considerable influence over Italy, both in politics and economics: as we have seen France is one of Italy’s chief foreign creditors and French corporations have a dicrete but extremely heavy weight in Italy’s economy.

    Only problem is nobody outside of France and Italy is buying this. This is “extend and pretend”: everybody knows those €20 billion promised by the Italian government were already spent the second the anouncement was made and far more will be needed over the next few years.
    Then there’s the question of recapitalization: Unicredit is not the only Italian bank that will need to raise record amounts next year.

  11. unit472 says:

    This is just a gigantic check kiting scheme. Bank A is stuffed with ‘risk free’ government bonds and Non Performing Loans. The only thing on its balance sheet that is worth ‘book value’ is the depositors money. To prevent the depositor from discovering his money is gone the government ‘guarantees’ the Banks bonds so it can sell them to Bank B who offloads the crap onto the ultimate toilet of Europe the ECB.

    • Bob says:

      Yes, ultimately the ECB buys this junk, so it’s no different than printing money (Euros). The bad actors benefit, while the prudent suffer. Every time I see this happening I lose respect for government. The governments role is not to protect the population against bad personal decision-making. If we continue this approach to government, the speculators and bad decision-makers will have everything, and there won’t be enough left to educate my kids.

    • Tom kauser says:

      Going to break the Euro like Kashkari broke the buck?

  12. Bob Rock says:

    One puzzling question of poor accountancy: the Italian Treasury lends money to MPS through shares and bonds and guarantees; at the same time MPS lends money to the Italian Treasury through government bonds.
    Sounds fake!
    Bank of Italy, italian government, italian opposition parties, judges, CONSOB, EBA, ECB, european commission, financial markets, savers, fund managers, businessmen, journalists, TV anchormen, weight watchers, blue collar workers, philosophers, unmarried women, blade runners, … can you hear me? Is there anybody out there?

  13. Kevin Beck says:

    No wonder the citizens of Italy want out of the EU.

    Not that it would immediately solve the problem of the horrid banks that they have. Instead, they might be able to extract some revenge against the outside banking interests by forcing them to take a haircut if they can’t be wrecked by the ECB.

  14. SocksEleventyFive says:

    While they bail them out from the public purse, but use QE that devalues what’s in the public purse, it’s only a matter of time until the inevitable happens.

    The real decreasing value of their currency is realised, and unhidable inflation ensues.

    Bailouts made while the value was high, the plebs get to enjoy their new lower spending power.

    Until real wealth is generated to drive real economic growth, isn’t it just a crash cycle or two away from complete failure?

    We’re already at zirp with stealth inflation rife in many manufactured items.

    I wonder how extend and pretend can continue without being blatantly clear to everyone.

    • George McDuffee says:

      RE: I wonder how extend and pretend can continue without being blatantly clear to everyone.

      As posted before, this is a mental health problem, exemplified by denial and willful belief. Along with “extend and pretend” many other legends, lore and superstitions have set and continue to set the policies by which government/society operates. A few of these were:

      * It is the divine right of kings, who are appointed by god, to rule as they see fit.

      * Plagues and epidemics are the will of god in punishment for our sins. This has been updated so than market/credit implosions and recessions/depressions are the will of “Mr. Market” in punishment for our economic/fiscal sins.

      * Plagues and epidemics are the work of the devil through witches and wizards. Updated to include arbs and high-speed computerized trading.

      * The state’s and peoples’ ills are all due to the presence of foreign elements/influences, which must be expelled.

      There are many more.

  15. Ishkabibble says:

    We are witnessing the final stages (the outcome, the moment of truth) of the completely experimental “trickle down” economic model that the Fed, etc. unleashed in ’08 – ’09. It is described as follows in the Fed’s one-page Bilble.

    “First, there was only darkness. Then God said, ‘Let there be light.’ Then God said, ‘Let there be a firmament in the midst of the waters, and let it divide the waters from the waters.’ Then God said, ‘Let there be banks.’ Finally, God said, ‘Let there be man.”

    As you can see, contrary to what one might expect, there is no complexity to this new economic experiment. It all boils down to this: TBTF banks come first; humanity later. That is, Humanity’s Ultimate Purpose is to serve the TBTF banks; not the other way around. Before humanity will be allowed to enter Heaven On Earth (Utopia), TBTF banks must first control everything.

    And, slowly but surely, as all of the TBTF banks’ “enemies” (ironically, NON-TBTF banks) are being assimilated by the TBTF banks, “we” are getting closer and closer to Heaven.

    Fed members know full well that the official inflation / employment statistics are pure B.S. and that inflation is in fact rampant and that low-paid people are borrowing and spending far more than they should.

    In the past, under these circumstances, the Fed would raise interest rates WITHOUT raising the IOER, until borrowing and spending were damped down, but this cannot be done today. So some how, any way, the Fed has to “encourage” banks to raise the interest rates that they charge for loans, as well as pay to “investors”, while at the very same time preventing the banks from moving their excess reserves (that they’ve been handed by the Fed) into the real economy. Again, the Fed’s twin moves attempt to do just that.

    The Fed-funded US military-security-industrial complex’s (MSIC) vital role in this new experiment is to enforce Fed policy domestically and, globally, to literally force the rest of the world to continue to accept printed-out-of-thin-air USD as payment for REAL goods. (The latter is the REAL US “foreign policy”.)

    To reiterate, there is very little complexity to the REAL, “forward going” goal of the Fed and other central banks. It is to do literally “whatever it takes”, including ignoring the Constitution and Bill of Rights, and, if necessary, even instituting martial “law” and mass domestic incarceration, to prevent TBTF banks from failing and thereby maintaining the Elite in the lifestyle to which they feel that they are entitled.

    Of course how to conduct the interminable wars and at the same time prevent the bewildered herd from stampeding (revolting) is a very complex task that requires a 24/7 MSM propaganda machine as well as a never-ending stream of obfuscating gibberish from Yellen and the members of the FOMC.

    Of course the wars and supporting MSM propaganda machine, as well as various Fed-funded hand-outs to keep the herd at manageably quiescent, are astronomically expensive, but all Janet’s not-so-invisible hand has to do is hold down the “0” key for longer and longer periods of time and all of the Elite’s invoices magically get paid and their wealth infinitely increased.

    The above is the US’s new economic system in a nutshell, folks. Janet holds down the “0” key for longer and longer periods of time; the TBTF banks get bailed out by taxpayers time and time again; the US national debt skyrockets; the US’s Fed-funded MSIC literally forces the rest of the world to accept those printed-out-of-thin-air USDs as payment for their REAL goods. Any nation that does not comply with US diktat and accept fiat USD as payment either has its government replaced or is reduced to stone-age chaos.

    The Fed’s USD used to be backed by gold. Janet’s trillions of fiat USD are backed by drones. Mercenaries paid by fiat USD
    now replace draftees, so there are no coffins flying back to Main Street, USA to get the bewildered herd riled up, so, as far as the herd is concerned, the wars can go on forever.

    There is very little MSM “coverage” of the thousands of US-funded murders and atrocities all over the globe and what little coverage there is only serves to support the US’s exceptional “peace-making”, “nation-building”, “democracy-spreading” efforts. It’s a tough job, but the US simply has no other choice than to do it.

    In short, the TBTF banks’ insulation is thick and the number of fiat USDs is infinite, so, unfortunately, it’s beginning to look like the one only thing that will stop the US’s new, politically-unstoppable “whatever it takes” perpetual-war / TBTF-bank-based economic system is a nuclear strike undertaken by nations who are being victimized by it.

    • Chicken says:

      Up to now, waiting for the response then betting against MSM scary news has been a lucrative trade. The market has died 1,000 deaths yet still goes higher.

      • Chicken says:

        Proof of concept: Hilary was gonna come down hard on expensive drugs, this presumably caused XBI to crater, right? Well low and behold, MSM was all over it and had convinced the world of a Hilary win but notice the lower trend line support held. I suggest Hilary’s friends just wanted a lower priced entry, Hilary had no intention of pursuing this campaign promise.

        Now it seems the same action is taking place following the Trump upset.

        Thus in the future, I will avoid refering to Trump as president so much as I anticipate referring to him as the Trump upset, as a reminder.

        • Chicken says:

          So anyone trapped above $60 has had their chance to exit, I bet they did, assuming they weren’t snookered into a loss. Stocks are sold, not bought.

          So now they’re out, kicked hard by the criminal enterprises, the XBI rockets to new highs.

          Thanks, MSM, we realize who your employers are, and it isn’t the public.

  16. KM Tang says:

    Let’s have another blockbuster movie. “The Italian Job II”.

  17. Kevin Simpson says:

    Funny how the tax payers in the US, France, Greece,etc are always on the hook for decisions made by ” THE CAPTAINS OF INDUSTRY”. in this great capitalist society. Then the elected officials vote to give them greater tax deductions so they contribute even less to the societies they say they are so concerned about. It is truly baffling. I suppose they can’t see what is really happening from their estates.

  18. Henrik Kramer says:

    Non-performing loans have all been received by some one!
    The loaned money is still somewhere in the hands of the lucky.
    Bailouts will make them even luckier.
    Legalised fraud on a massive scale.
    That is what it is!

  19. anthony hall says:

    2008 all over again ;Save the Banks from their Greed and Corruption! Anther job for International Taxpayers Rescue. The ” Masterbaters of the Universe” keep tripping over Their Meat. Unregulated Capitalism never works . Maybe Standard and Poor, Fitches etc will Rate the Italian,Spanish,French and Deutsche Banks AAA ? Instead of “Dog Shit”.

    • George McDuffee says:

      RE: Maybe Standard and Poor, Fitches etc will Rate the Italian,Spanish,French and Deutsche Banks AAA ? Instead of “Dog Shit”.
      Only before these are covered with gold spray paint. Consolidation/creation of CDOs from these “gold nuggets” will transform them into an AAAAAAAAAAA rated investment

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