Italy’s “Bad Banks,” Created to Save the Financial System, Are Themselves on Verge of Collapse

“The €20 billion the government has set aside is starting to look like small beer.”

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

Officially dubbed “Bad Banks” — not to be confused with the plain-vanilla bad banks that brought the global financial system to the brink of meltdown — are all the rage these days, particularly in bad-loan-infested Europe. And if the European Central Bank gets its way, their numbers could be set to expand even further. On Friday, ECB Vice President Vitor Constancio called for the creation of a whole new class of government-backed bad banks to help buy some of the €1 trillion in unpaid loans that have weighed on Eurozone banks since the financial crisis.

Here’s how it would work: the already deeply indebted governments in question would issue a load of new debt in order to buy up, supposedly at a heavy discount, billions of euros worth of toxic loans festering on the balance sheets of the banks. In other words, unless you’re a senior banker working for an insolvent bank, or an investor with sizable holdings of slowly putrefying bank shares or bonds, these taxpayer-funded bad banks are by nature a bad idea, as Spanish economist Juan Ramón Rallo warns:

A bad bank is a mechanism for redistributing the wealth of a country from its taxpayers to the shareholders, executives, workers and creditors of financial institutions… The logic is disarmingly simple: if the only party willing to buy the [toxic] assets at the prices [offered by the banks] is the State, the chances are that the assets are not worth what the State is paying for them.

Inevitably, the taxpayer-funded bill keeps rising as the losses stack up, until it can rise no further, putting the bad bank in question under unbearable strain. That’s precisely what’s happening in Italy where it emerged last week that Unicredit, the country’s biggest bank and only G-SIB (global systemically important bank), has significantly written down its investment in one of Italy’s two deeply opaque, part-privately owned bad banks, Atlante I.

Unicredit has not specified the exact amount of the write-down but according to the Italian daily Il Fatto Quotidiano it’s likely to be somewhere in the region of €500 million, or roughly 70% of the €700 million the bank has contributed to the fund. The write-down forms part of a massive €12.2 billion clean up of Unicredit’s books as the bank prepares to raise — or at least try to raise — €13 billion in new capital in the coming months.

News of the write down is sure to raise the hackles of Atlante I’s other investors, which include banks, investment funds and a handful of public-private institutions. On Friday, Italy’s second largest bank, Intesa Sanpaolo, which together with UniCredit is Atlante’s biggest investor, said it had written down the value of its stake in the fund by 33%. According to Reuters, a group of about half a dozen other banks that have invested in Atlante have held a series of meetings to discuss the scale of their own possible writedowns.

Atlante I’s funds were largely privately sourced, with Italy’s two largest banks coughing up roughly €1.5 billion between them. 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 Italy’s €360 bad-debt problem!

It was never going to be enough, so the Italian government and banking community doubled down on their failed policy, creating another bad bank, imaginatively titled Atlante II, with the express purpose of helping to remove some of the toxic debt putrefying on the balance sheets of Italy’s third largest bank, Monte dei Paschi di Siena (MPS), which is now in the process of being bailed out.

Atlante II received much smaller contributions from Italy’s “healthier” banks and a much larger stake 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. But like its predecessor, Atlante II was chronically underfunded.

Its creators’ dream of spurring the creation of a true market for deteriorated credit in Italy, where bankruptcy proceedings are notoriously slow and cumbersome, is now in tatters. Atlante II was founded in spring 2016. Just six months later, Italian senior banker Giuseppe Guzzetti, who helped set up the bad banks, said that it was already “out of breath.”

And now what little funds Atlante I and Atlante II have left are hemorrhaging value as the “assets” they’ve been used to buy up, invariably at prices that were too high (often at over 40 cents on the euro), continue to deteriorate.

The two bad banks’ worsening woes are a reminder of the gargantuan task facing the Italian government as it attempts to stabilize the country’s banking system, which is creaking under a bad debt overhang of €356 billion – a third of the Eurozone’s total. Unicredit’s decision to write down its investment in Atlante is almost certain to discourage the private sector from pumping fresh funds into Atlante to bail out weaker banks.

That in turn puts more pressure on Rome, increasing doubts over whether its current bailout kitty of €20 billion will be enough to stabilize the Eurozone’s fourth-biggest banking system. The government has already earmarked about a third of that money to rescue MPS alone. “The 20 billion euros the government has set aside is starting to look like small beer,” Milan-based banking analyst Vincenzo Longo of brokerage IG told Reuters.

When Spain rescued its banks five years ago it spent €53.55 billion (not including government guarantees), of which only €2.69 billion has been recouped. At that time Spain’s public debt to GDP ratio was 85%. That compares to Italy’s 135% of GDP today. Nobody knows just how the world’s fourth most indebted government will be able to raise the sort of funds needed to stabilize the country’s financial system without pushing itself over the edge of the debt precipice. In an ominous sign, Italian government bond yields have been surging, and the yield spread between the Italian and German 10 year bond is nearing three year highs.

But markets are still hoping that the ECB will do whatever it takes to make sure that the banks’ self-inflicted problems will soon become the taxpayers’ burden! By Don Quijones.

They said it was contained, but now it hit the largest Italian bank. Read…  Is Italy’s Banking Problem Becoming Too Big to Solve?

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  33 comments for “Italy’s “Bad Banks,” Created to Save the Financial System, Are Themselves on Verge of Collapse

  1. Si says:

    Quelle surprise

  2. Sound of the Suburbs says:

    Why doesn’t the ECB act like a Central bank and buy up these bad assets with freshly printed money at no cost to taxpayers?

    The FED did it in the US after 2008.

    • Wolf Richter says:

      watering down the currency so that everyone pays the price for the misdeeds of the few and to bail out the largest investors in those securities?

      Yes, that’s what the Fed did, and that’s what the ECB is already doing much more than the Fed did (under its QE program), though so far the debt that the ECB bought (including Greek debt) is being kept from defaulting by new bailout money being issued that allows for this debt to be refinanced.

      • Troy Ounce says:

        Everything started on August 15th, 1971.

        • d says:

          Euro bank fraud, is as old, as non Jewish owned, Euro banking.

          However many corrupt Euro politicians have become involved and they fear contagion (bank run’s) to the whole wrotten club med banking sector, if they start to systematically let, club med bank’s fail .

          They fear the greek situation, greek citicens are not broke, they have more money in Banks than the greek national debt.

          However the vast majority of that money, is not within the reach of the greek state, or in greek bank’s.

          The ECB can be harsh, and do what has to be done, wind up bank’s, when IT WANTS TO, like in Cyprus.

          The mafiosi at the ECB is protecting his mafia masters club med pets, at the expense of the German taxpayer, and other EU states that actually contribute to the EU, and ECB budget.

          It appears more  and more, that he is in fact willing to destroy the EU, to protect them.

        • Realist says:

          In a certain way, you could blame France’s De Gaulle for August 15th, 1971. After all, it was De Gaulle who did exchange France’s USD to gold, he used to send the French fleet to NY loaded with USD and the fleet returned loaded with physical gold from the NY Fed’s vault ;) Even the obient Brits did towards the end exchange their dollars for physical gold ….

          It would have been quite interesting to see what would happened if Nixon hadn’t done what he did when the next shipment of dollars would arrive and the USA would have been unable to cough up the needed amount of physical gold. What would have happened to the dollar an the world economy in that case ?

    • Jonathan Vause says:

      haven’t you just put your finger of the eternal problem of the euro – Americans might roll their eyes if the Fed bails out the banking system (at no cost to households as taxpayers, but at a cost to everyone who holds/is long monetary assets), but ultimately they understand that the health of the US banking system is of importance to all Americans. that isn’t true in Europe – it might well be the case that the health of the Italian banking system is of importance to all Germans, but Germans don’t necessarily understand that, or agree that their currency should be ‘watered down’ to solve a problem in another country (which they probably blame, quite incorrectly, on the personal/moral failings of the Italian people/government). the euro as it stands is a hopeless halfway house – to anticipate nick kelly below, it either needs to move to full fiscal union/a US of E, or let each country set its own independent monetary policy/have its own lender of last resort because, y’know, that’s really important

      • d says:

        “to anticipate nick kelly below, it either needs to move to full fiscal union/a US of E”

        Ever closer union including clandestinely complete fiscal union, was on track until the 08 explosion.

        Now all they nays have the willing ears of the large number of financially disaffect due to 08, and more importantly, chinese job theft.

        Project Clandestine fiscal union is on the rock’s.

        The failure of the EU to control immigration, places the union itself at risk ,which is why we no have Talk coming about.

        The Brexit move, whether it finally happens or not, is bringing about some much needed discussion of directional change, in the socialist dominated EU..

        Whether England leaves or not, it has done Europe a great favour, as these issues would not be discussed until it became untenable to sweep them under the rug any longer..

    • Chris Wagner says:

      Are you serious? “At no cost to taxpayers”? Welfare losses due to a falling Euro will be borne by the taxpayers as well.

      Not to mention the fallout regarding the ECB’s credibility.

      Putting lipstick on a pig – yeah, it might work for a few days :–)

      • Sound of the Suburbs says:

        What’s the difference between that and what the FED did?

        US banks roared away when cleansed of their bad assets.

        Did the dollar collapse?

  3. Tom kauser says:

    America could buy a lot of cork from Sardinia?
    Be unloading trucks all weekend?

  4. nick kelly says:

    Wow- not a single comment so far saying the solution is to leave the euro zone and go back to the lira.
    I guess it is a little early.

    • d says:

      That’s a can kick, not a solution.

      The solution is to resolve the NPL issues.

      That means winding up banks and company’s along with exposing a huge amount of Mafia and Political fraud.

      Not something mainstream Italian politician’s will be allowed to do, by the people who own them, the mafia.

      Which is why before the mafia take a hold over it. 5 star is still a tiny ray of hope in Italy.

  5. anthony hall says:

    “bad loans” – gifts to bad people who never have to pay up. P2, Mafiosi, The Vatican, Berlasconi , FIAT, the EUROGROUP, etc, etc . EuroTarp Trillion Euro Theft.

    • d says:

      P2, Mafiosi, The Vatican, etc, etc .

      You left out the italian free masons, which P2 is part of. And all the italian mainstream political party’s.

      That whole group is the italian mafia. Just different sectors of it

  6. John says:

    I am no expert on Italian banks and I am curious about the toxic assets themselves. The only thing the article really says is that the rescue is paying too much for them. In general, who are the debtors, what assets secure them, and how much is actually being paid off?

    (i.e. Can this be partially fixed by extending maturities, rather than bankruptcy (of the company or state) or inflation)?

    What are the total deposits and assets at these banks?

    There is no good way out of this, but turning several knobs based on realistic assessments is a more manageable policy fix than simply flipping various switches.

    Also, I understood the debt holders of the banks include a lot of Italian retail investors, which may be why the Italian government is reluctant to simply stick the shareholders.

    • d says:

      “In general, who are the debtors”,

      The majority, mafia, or mafia controlled insolvent entity’s

      “what assets secure them,”

      effectively none.

      All those bridges and highways, built in rural areas, that go nowhere. by Mafia companys that own nothing, and owe everybody. Etc Etc. Italy is riddled with such scam’s.

      They all get bank finance, as the bankers can not “Refuse”.

    • disc_writes says:

      The debtors are small businesses, for the most part, and mortgage holders.

      Loans to small businesses are not secured by any real collateral: small companies are liquidating in droves, and auction prices for machinery in a country that has stopped producing anything are not very high. You can ship the things off to the Balkans on the cheap, though.

      Mortgages are supposed to be backed by the property itself, but auction prices are much lower than normal market prices (not the usual 30% discount, but 50% or more. Auctions often receive no bids).

      A few anecdotes: my father was renting an apartment of some 60m2 in an area with average prices of 1600EUR/m2 in the regular housing market. When his landowner went bankrupt, the apartment was auctioned off for 27000EUR after the 7th or 8th round. The process took about a year and a half.

      A small villa in a residential area around Asti with average prices of some 1000EUR per m2 was auctioned off for 30000EUR. I do not know the exact size, but it must have been at least 150m2.

      When my mother’s bakery went bankrupt, her house was sold off at a 50% discount – of the price she had paid in 1999.

      My father runs a small business as a plumber. The hardest part of his job is getting paid by his customers. A tribunal where he had worked recently stopped paying the bills. The tribunal is morose on its bills.

      Another customer, a textile company in the Prato area, was bought by Chinese competitors and immediately shut down.

      Banks reduced financing to small businesses after Draghi decided to use them to finance the unbearable Italian public debt (“whatever it takes”). So many businesses lost access to liquidity since 2011. And the state in not any less bankrupt as a result.

      The state has been reining in spending and “forgetting” to pay suppliers since 2011. So many businesses lost access to their largest customer.

      About the claim that many debt holders of the bank are retail investors: about a third of the bonds are in the hands of small investors. But that is largely an excuse to syphon off public money into private hands:

      – there are not that many small investors in Italy, a country that both invented and abhors banks and

      – retail investors are relatively rich, so they can take a hit.

      Two points I have tried to make on this blog before, but a Bloomberg article seems to agree with me:

  7. Doug says:

    Joining the E.U. is the same as The Hotel California.You can check-out any time you like, But you can never leave! . The only way any country will ever leaves the E.U. is with its complete disintegration.

  8. Once a Banker says:

    This is so stupid. The basic maths is that the loans are not worth face value so you can’t sell them at face value.

    The risk investors (bondholders and shareholders) just have to take it in the neck.

    It is really hard to believe the people stand for this. The MSM has everyone brainwashed into thinking these sorts of actions are necessary as opposed to a choice. The idea that governments bail-out private investors is utterly repugnant.

    The banks are broke so the Italian Government should nationalise them and then one day, once stabilised and re-capitalised, they can re-float the banks to claw back some of the losses.

    • Chris Wagner says:

      How is the business intelligence market responding to all this? In the real world, a NPL should be more than the banks’ problem. As companies and private debtors will get “blacklisted”. It’s a form of financial suicide. Yes, those loans may never get repaid. – Now, good luck to getting NEW LOANS any time soon!

      How desperate must entities be to choose this kind of death by credit-starvation?!

      Elsewhere, I read that the EU’s banking sector has been shrinking.

      It’s just a matter of time before the ECB will need its own bailout. That tARGET 2 EUROSYSTEM is utterly insane. Allowing failing members to go on spending sprees without oversight, applications, the option to refuse or upper limits. It’s like some deadbeat shopaholic getting Bill Gates’ partner card.

      The bank of greece left a neat little ‘I:O:U’ note for the Bundesbank @ 0.75%. Now they took a 3-figure amount in € billions which will never get repaid.

      The empress in Berlin and those politicians keep shtum about all this and when there will be a vote, the parliament won’t hear the FACTS.

      Something has got to give, don’t you think?

      Universal debt forgiveness to coincide with the removal of those NPLS perhaps?

      A healthy system penalises those who mess with their loan obligations.

      • d says:

        “How desperate must entities be to choose this kind of death by credit-starvation?!”

        Son you are talking about “Italy”, home of the Mafia and the corrupt roman catholic church.

        Most of those borrowing entity’s, only existed on paper to start with, which the bankers full well knew (nice kickback’s for facilitating the loans, they got).

        This is why nobody ever tries to “Collect” on the vast majority of the Italian and Spanish NPL’S in question.

    • disc_writes says:

      My opinion precisely.

      I am not a fan of the government running things, but the state should wipe out all investors, rich or poor, nationalize the banks, and start anew. Like Sweden after 1992.

  9. Tom kauser says:

    The IMF is the only clean balance sheet and China needs to make loans?
    Pope needs yield too! Yuan a reset? Everybody can be a yuan-coin miner.

    • d says:

      “The IMF is the only clean balance sheet ”

      The IMF regularly roll’s, until it cant.

      When the IMF wont roll, crash time.

      Its balance sheet is very dirty, however if you default to the IMF you basically cant obtain funding. Anywhere, until you pay it.

      The only upside to the IM,F is that it has basically consistent criteria to make loan assessments by.

      • Tom kauser says:

        The ECB is just waiting for the check (swap) from the fed?
        ECB is a branch of the new York fed bank?

      • Tom kauser says:

        Sdr’s are as full as an Easter basket!
        Just waiting for the worst time to propose the magic bullet that saves the world by buggering the trapped?

        • d says:

          Problem for that being, the trapped have to allow themselves to be Buggered/Sodomized.

          As there is CNY in the SDR, there may be a great refusal.

          Then what will the financial wizards do to protect themselves from the huge mass of angry trapped???

          The wealth of the world is moving into an inverted pyramid, the larger it gets, the harder it will be, to keep it stable, and the small will become the thing, required to crash it.

  10. Rob says:

    Italians engaging in creative accounting?
    Well they were responsible for its invention more than 500 years ago:

    Of course, it’s no coincidence that Luca Pacioli was also a “man of the cloth” as accounting was primarily invented to keep “accounts” for the only institution around at the time that actually had any property to account for! Only some time later did the Merchant and political elites realise that this invention could also be applied to any and all personal/collective wealth reckoning. The rest, as they say, is history. But it’s still good (sort-of) to observe that the Italians have maintained their innovative edge in this hotly contested and ever-growing information obfuscation and loot-the-populous sector of activity.

  11. R Davis says:

    Today .. the banks serves to attract .. set up the customer in the system & assist in upgrades & glitch solving .. they are the front office.
    Today the bank does not know anything about the customers banking regime .. they have outsourced their online banking tasks to big tech companies.

    Q. Is this wise of them ?

    If you leave a gap between you & someone you love someone else will step in & fill that gap.

    “bad banks that brought the financial system to the brink of meltdown”

    1. are we not sick of that ?
    2. how stupid is it .. that the global economies & the well being of corporate & business on planet Earth .. depends on a bunch of No-account Excess Addicted Cowboys !

    What to do ?
    What to do ?

    Eradicate them.
    Take over their operations & eradicate them.

    In conversation with my son, who sells IT security to corporate bodies, he explained how the advancing technology has allowed so many other corporate bodies to evolve.

    It occurred to me that this was the sound of the death knell of banking as we know it.

    “All the better to eat you with my dear.”

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