Italy’s Banking Crisis Is Even Worse Than We Thought

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The insider blame game has begun.

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

In this late winter of generalized discontent, it is not easy to pinpoint just where the biggest threat to Europe’s increasingly flimsy union lies, so intense is the competition. One obvious contender is the Eurozone’s third largest economy, Italy, which faces a banking crisis, an economic crisis, a debt crisis, and a political crisis all at the same time.

The country’s Five Star Movement is gaining momentum both in the polls and in its efforts to call for a referendum on euro membership. In the meantime, Italy’s newly installed government wants — indeed, needs — to bail out a growing number of banks but has neither the money nor the political capital to do so.

Things had gotten so bad that the country’s two bad banks (Atlante I and Atlante II), ostensibly created to stabilize the financial system, were themselves on the verge of collapse. Turns out that things are even worse than we had thought, following a blistering tirade on Tuesday from Italy’s bad banker-in-chief, Alessandro Penati.

“There is no clear vision of the problem and no strategy,” Penati told a financial conference in Milan, according to Reuters. He said he was virtually working alone on rescues that had revealed “horror stories” within some banks.

In short, the insider blame game has begun.

Penati, whose boutique asset management firm, Quaestio Capital Management, was chosen to oversee the supervision of Atlante in late 2015, directed much of his ire at the banks themselves, in particular Italy’s two largest financial institutions, UniCredit and Intesa Sao Paolo. Atlante’s investors had, he said, shown “zero long-sightedness,” after declining to invest more in the fund, which has used 80% of its money to rescue two mid-sized banks in northeast Italy — Veneto Banca and Banca Popolare di Vicenza. Both these lenders now need more capital.

Intesa has devalued its stake in Atlante by 33% and a source has said Italy’s biggest bank, UniCredit, itself in serious need of help, could write it down by as much as 70%. “They invested in failed banks … you need to wait three years before assessing how much a bank like that is worth,” Penati said.

Penati’s comments echo previous criticism by Italian senior banker Giuseppe Guzzetti, who helped set up Atlante I and Atlante II. Unlike Penati, however, Guzzetti heaped much of the blame for the bad banks’ chronic underfunding on Credit Agricole and BNP Paribas, two of the French banks most exposed to Italian sovereign and banking debt but which refused to “do their part” in cleaning up Italy’s financial system.




The fact that private-sector institutions are refusing to provide more money to Atlante I or II and are instead writing down their current investments in those funds does not bode well for Italy’s chances of rescuing its collapsing banks with the help of the private sector. The original idea was that Atlante I and Atlante II would help create a secondary market for Italian non-performing loans (NPLs).

Now, that dream is in tatters. As shown by the recent farcical attempts to rescue Italy’s third largest bank, Monte dei Paschi di Siena (MPS), without a robust secondary market, the task of cleaning up Italy’s bank balance sheets could prove near to impossible.

In December, Penati’s plan to buy into Italy’s biggest-ever sale of bad debts — €28 billion of loans written by MPS — fell apart when the bank failed to find any other major investors. According to Penati, the sale collapsed because it had been tied to a capital raising that had been “badly devised and even more badly executed.”

In a statement that should send shivers down investors’ spines, Penati noted that his job had taken him inside some dark corners of Italian banking. “I had never looked at banks from the inside … I was stunned they are run in this way,” he said.

Given the sheer scale of the problem and the likely refusal of northern European countries to hand over a blank check for Italy’s government to rescue its broken banking system, especially in the lead up to national elections in Germany, any lingering hope that state intervention will do the trick is seriously misplaced, as Penati himself warns.

As eurocrats hone their skills at their time-honored game of extend-and-pretend, Italy’s banking insiders are turning on each other like ferrets in a sack. All the while, investors are voting with their feet. As shown by Italy’s Target2 imbalances, the exodus out of Italian assets continues to gather momentum and the spread between the Italian 10-year yield and the German 10-year yield — the ultimate indicator of the dreaded Doom Loop — just reached a level that hadn’t been seen since November 2014.

It is against this torrid backdrop that Italy’s biggest bank, UniCredit, which ranks among the 30 global systemically important banks (G-SIBS) identified by the Financial Stability Board — i.e., is genuinely too big to fail — is somehow supposed to pull off the biggest capital expansion in Italian stock market history. If it fails in that endeavor, it won’t be long before the dominoes begin to fall. By Don Quijones.

“The €20 billion the Italian government set aside is starting to look like small beer.” Read…  Italy’s “Bad Banks,” Created to Save the Financial System, Are Themselves on Verge of Collapse




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  33 comments for “Italy’s Banking Crisis Is Even Worse Than We Thought

  1. mvoj
    Feb 8, 2017 at 2:24 pm

    Mama Mia!!!

  2. SnowieGeorgie
    Feb 8, 2017 at 2:36 pm

    TOO BIG TO FAIL ?

    Pure fiction. This lie is created by the elites and their bankster pals to provide then with extreme benefits. From the 99.995% of course.

    NO INSTITUTION IS TOO BIG TO FAIL, just like no person is too young to die.

    We can cling to our dreams and our wishes, or we can just face reality.

    SnowieGeorgie

    • Essie
      Feb 21, 2017 at 3:16 pm

      Would you recommend sending payments to a boutique hotel for a summer wedding with earthquakes and financial issues in Italy, particulary Florence >> ???

  3. Sound of the Suburbs
    Feb 8, 2017 at 3:46 pm

    Unconditional bailouts for bankers and austerity for the people hasn’t gone down well in the Club-Med nations.

    Government bailouts would be a dream come true for Five Star.

  4. Chris
    Feb 8, 2017 at 4:02 pm

    In a free market nothing is too big to fail and nothing is too small to succeed. We do not have a free market. We have an economy that is controlled to a large extent by crony insiders connected to the Government, the MIC and the Financial Industry.

    • Dan Romig
      Feb 9, 2017 at 7:04 am

      So true Chris! Yesterday’s WallStreetOnParade has an interesting piece on what’s happening in the USA regarding Jay Clayton and the SEC.

      ‘Moves in Gold Price Suggests There’s Trouble Ahead’
      http://www.wallstreetonparade.com

      A quote from Penati, “… I was stunned they are run in this way.” Really? What the hell did he expect when he ‘looked at banks from the inside’?

      Once again Don, nice use of language!: ” … turning on each other like ferrets in a sack.”

  5. Debravity
    Feb 8, 2017 at 4:38 pm

    Hey Don, thanks for the info.. May I ask you for a kind of qualitative prediction; what you think may happen to the Euro in light of the current state of affairs? We live in Ireland…

    • Don Quijones
      Feb 8, 2017 at 5:25 pm

      Debravity,

      Tbh, my guess is probably as good as yours. The outlook is so clouded with uncertainty these days that it’s virtually impossible to tell which way the wind is blowing.

      That said, I do feel (and to a certain degree fear) that after juggling (and somehow keeping at bay) a bewildering constellation of threats and challenges (Grexit, Quitaly, banking meltdown in Spain and other places, the rise of anti-EU sentiment and populist forces all over the place, Brexit…) over the last eight or nine years, the EU could finally be in the process of losing its grip.

      Brussels, Germany and France are now talking about a two or three-speed Europe but how they actually achieve that without the whole project buckling under the strain of the enormous complexities and contradictions it unleashes is beyond me.

      Ultimately, for the euro to have any chance of working over the long haul Brussels needs to consumate fiscal and political union, and the European public seems loath to sign off on such a prospect (not that their voice is always listened to, of course). Then, there’s the problem of the banks…

      In my view, the biggest scheduled ‘political’ event to watch out for in the coming months are not the elections in France or Germany (where the threat of overt change, I suspect, will be more or less contained by the respective political establishment) but in the Netherlands. But that, dear Debravity, is just a gut feeling I have.

      • d
        Feb 9, 2017 at 4:19 am

        Brussels, Germany and France are now talking about a two or three-speed Europe but how they actually achieve that without the whole project buckling under the strain of the enormous complexities and contradictions it unleashes is beyond me.

        In this two or three speed Europe, will be England, with control of it borders and laws as it wants, with full unrestricted market access, still contributing to the Eu budget will a full say in the Eu, as ultimately at this point in time, the Eu can no run the risk that may will simply take her cards off the table and say “we pay nothing more from now”. WTO rules in march 2019.

        Just like thatcher with the Eur, May does have what it takes, to just get up and walk away.

        Remeber no agreement at the end of 2 years clean WTO rules brake, also means no more money to the Eu at the end of two years.

        No agreed settlement find a court outside the Hague/brussels to sue me in. as I am no longer bound by the Hague/Eu courts.

        Every time since 1066 Europe has played tough with the British the euro trash has always got their tails kicked. flooding the euro tunnel returns England to its status quo “try crossing the channel”.

      • Debravity
        Feb 9, 2017 at 7:34 am

        Thanx Don. Hmmm, interesting. Where does one look to find out about the 2 and 3 speed economy?
        Do you think there is any risk to the actual euro as a currency

      • Kit
        Feb 10, 2017 at 7:58 am

        Well, I live in NL and I am convinced Wilders will end up with the largest party in March.

        The polls suggest he will get about 30 seats, but even factoring in a very strong Brexit/Trump effect could not push him past say 40 seats.

        That is a long way short of the 76 he needs to govern on his own and none of the other large parties will form a coalition with him, so he will be leader of the opposition.

  6. Al Tinfoil
    Feb 8, 2017 at 4:50 pm

    Coming soon to a theater near you:

    “The Italian (Bank) Job”, a hilarious comedy starring an all-star cast of blustering idiots as a circular firing squad.

    A story so outlandish that it could not possibly be based upon truth.

    Brought to you by Hopey Changey Extend and Pretend Bankster Productions, Super Mario Raggy, Erica Muddle, and Wolfie Shambles, Executive Producers

  7. bobby
    Feb 8, 2017 at 6:28 pm

    Great article! I feel we are in the calm before the storm.

  8. unit472
    Feb 8, 2017 at 6:53 pm

    Banking crisis, economic crisis, debt crisis, political crisis AND immigration crisis. Thousands of destitute, economically useless African migrants pouring in every month is the most destabilizing issue of all. Italians can cope with their other crisis but there is no way they can absorb the ‘wretched refuse’ of Africa.

    • Sound of the Suburbs
      Feb 9, 2017 at 7:32 am

      Got this the other day from from ZeroHedge.

      It illustrates very well just how bad the global poverty problem is and how US immigration is just a drop in the ocean.

      https://www.youtube.com/watch?v=LPjzfGChGlE

  9. NotSoSure
    Feb 8, 2017 at 7:53 pm

    Dejavu abound. I have a feeling that next year we’ll be at the same exact spot. Well, with the exception of JP Morgan having earned another 3 billion or so in various fees.

    Another victory for the Muppets!!

  10. R2D2
    Feb 8, 2017 at 8:29 pm

    I think the cover up is everywhere; look at the stocks; all these companies who use non-GAAP accounting are hiding the truth about their operations. If you have nothing to hide, why the hell would you need to use non-GAAP reporting.

    Once the crash starts, then it would be far bigger than what happened in 2008.

  11. Paulo
    Feb 8, 2017 at 8:50 pm

    Don,

    If the Union fractures, what happens to the refugees lodged in various countries waiting to go elsewhere?

    Do you think there is any chance of refugees returning home if Syria settles down? North Africa? Or, are they lodged in Europe for good? There is no work, after all.

    And, (I know you are not omniscient, but…..) if the Union falls apart will Europe return to strife and warfare, or has something been learned in the process? Is there not any hope for a revision to the Experiment?

    Thank you for your opinions in advance.

    • Feb 8, 2017 at 9:30 pm

      Let me give it a shot – on just one of your questions. It’s one thing I’m totally sure of (knock on wood): if the Eurozone falls apart, there will not be, in my lifetime, warfare between the current members of the EU. No one wants that. Its in no one’s interest. The big money is not lined up behind it. Too many lessons were learned too painfully. So that’s one worry I don’t have.

      • nick kelly
        Feb 9, 2017 at 8:51 am

        Agree that collapse of euro and perhaps EU wouldn’t cause major war, i.e. between largest founding members France and Germany but it would embolden Russia.
        Russia is already reacting to Trump’s election and tension is rising rapidly in Kosovo, the former province of Serbia whose independence is recognized by the West but not by Serbia or Russia.
        Serbia was restrained in the late 90’s after several massacres by a NATO bombing campaign.
        It was of course Russian backing of Serbia that led to WWI, (although most would describe that as defending Serbia from invasion rather than backing Serb aggression)

        It is possible that those looking for a big shake up in the status quo are going to get one.

        • Paulo
          Feb 9, 2017 at 11:30 am

          Thank you, folks.

        • d
          Feb 9, 2017 at 11:26 pm

          “It was of course Russian backing of Serbia that led to WWI, ”

          WRONG.

          What became WW I, was started by the french, after their 1870 defeat, it simply took 43 years for their deliberatly spun web of interrelated treatys to start WW 1 as they always intended them to do.

      • Valuationguy
        Feb 9, 2017 at 11:01 am

        With the current NATO structure being the major military force in the EU….I agree with you. It becomes more interesting when/if the US reduces its commitment to NATO (as Trump is hinting)…which then forces the member states to arm up as the U.S. shield is reduced.

        The problem is however that NATO…like any outdated organization…needs to justify its existence…thus revealing the true reason for the vast provocation all along Russia’s borders currently encouraged by the neo-cons&libs in the U.S. (including Obama).

        The EU (in Brussels) like this because it focuses attention on the EXTERNAL threat (Russia) diverting it from the various crisis that are domestic to the Eurozone (or even individual nations) such as the banks. The hide the coin shell game that is modern global banking collapses when only ONE ‘too large to fail’ bank goes down….and you have several in Europe that meet that criteria just as the confidence in the Euro is going in the toilet. Liquidity evaporates when it is needed most.

        Frankly…should Trump succeed in reducing tensions with Russia…the biggest threat to the EU will be (is) the nationalistic parties of Europe taking over and ignoring Brussels going forward. The current polls in France and Germany are as highly susceptible to the misread of the mood of the masses as they were in Britain and the U.S.

      • nick kelly
        Feb 10, 2017 at 12:20 pm

        I might have known that someone would jump in about WWI.
        Of course, books about the UNDERLYING causes of the Great War would fill not just a room but a small apartment building.
        No doubt French resentment at their defeat in 1870 is one of them.
        Another is the emergence of Germany as the fastest growing economy while Britain and France still held much of the rest of the world as colonies, and yet another was etc. etc.
        The PROXIMATE start of the Great War is the point where one great power declares war on another- only this can set off the chain reaction of interlocking treaties.
        The first great power to declare war on another was Russia declaring war on Austria-Hungary, after the latter declared war on Serbia.

        BTW: in the 60’s German professor Fischer became the first historian to access Germany’s pre-war diplomatic cables and notes, and in the words of the profession, made obsolete all previous work.
        At least to Fischer, it is clear that Germany wanted a ‘small war’ a that would strengthen her only ally, Austria-Hungary, and hopefully fracture the Entente between Russia and France. This would be achieved if Russia backed fellow Slav Serbia but France didn’t.
        In poker terms, Germany made a huge raise into a smallish pot, convinced that even if she was called she had the better hand- a stronger military.
        The few weeks after the assassination the notes from Germany to Austria insist that she deliver an ultimatum to Serbia, a sovereign state, that was impossible to accept, e.g, the investigation would be conducted by Austrian cops inside Serbia.
        Austria- Hungary on the other hand was reluctant to play for such high stakes, but Germany insisted that Germany was prepared for war with Russia AND France.
        The fatal German error was convincing herself that Britain would remain neutral (as in 1870)
        In 1914 even when Russia and France had declared war there was a period when Britain hadn’t. But when a million German troops invaded Belgium on their way to Paris (just passing through not staying, said Germany) to which Britain was bound by treaty, Britain also declared war.

  12. Vichy Chicago
    Feb 8, 2017 at 9:54 pm

    “without a robust secondary market, the task of cleaning up Italy’s bank balance sheets could prove near to impossible.”

    There’s the rub – there is no robust market, secondary or otherwise, and trying to force the issue wasn’t going to make it appear.

  13. John Doyle
    Feb 9, 2017 at 12:28 am

    Italy, probably as a prelude to leaving is just going to unilaterally write up the euros necessary to buy out all the debts, – act as if it is sovereign.
    The EU will protest but I doubt they will stop it since the alternative is pretty dire already. Every participant has painted themselves into a corner.
    It does assume the pollies have the bottle and that’s no sure thing. Look at Greece.

    • disc_writes
      Feb 9, 2017 at 9:17 am

      Yes, I agree that Italy will resort to printing Euros to save the banks. That is what Penati indirectly said when he admitted that public bail-outs are the only way banks accept as a solution.

      The state is broke, printing German-backed Euros is the only way left.

      An overlooked side-show is Intesa trying to become too big to fail by buying Generali – before Unicredit capital expansion in June and before the German elections.

      That would increase the pressure on the ECB to bend the rules even more to save not just one, but two globally systemic important banks.

      I really hope the Germans will finally draw their line in the sand and either leave the Euro with their consorts.

  14. MC
    Feb 9, 2017 at 4:07 am

    Two pieces of very relevant news.

    First, despite the kabuki in Frankfurt the fiction has been dropped on bank bailouts. Last week Veneto Banca issued two batches of short term bonds, one coming due in 2019 and the other in 2020. Fitch rated them BBB+, same rating as the Italian government, with the justification they are directly backed by Italian taxpayers and so they are effectively nothing more than sovereign bonds by another name.
    For the records the 2019 issue has a nominal yield of 0.4% and the 2020 a massive 0.5%. At the moment the official inflation in Italy is 1.8%. No further comment is necessary.

    Second, yesterday the Italian parliament voted against making available to investors a list of the names of the worst offenders in the NPL fiasco, meaning debtors who are failing in their obligations and owe to the banks more than one million euro. As there are all kinds of nasty rumors about big Italian groups being profitable only thanks to banks turning the other way, this is looking more and more like a repetition of the South Korean banking crisis.

  15. disc_writes
    Feb 9, 2017 at 11:10 am

    >In a statement that should send shivers down investors’ spines, Penati noted that his job had taken him inside some dark corners of Italian banking. “I had never looked at banks from the inside … I was stunned they are run in this way,” he said.

    I believe investors in large Italian institutions do not look at fundamentals, or at how well the companies are managed, or how good the business plans are.

    They just want to know how that the state will bend the rules on those companies’ behalf, and bail them out if necessary.

  16. Tom Kauser
    Feb 9, 2017 at 12:01 pm

    Jamie Dimon has left the building!
    Learn to swim?

  17. Feb 9, 2017 at 9:54 pm

    The Black Swan speaks Italian

  18. Ole Olesen
    Feb 23, 2017 at 5:09 am

    When considering this ” EUROPEAN ” Debt .. one isssue comes to my mind ..all the time.

    TO WHOM IS ALL THAT DEBT OWED ?

    Considering that the external Capital Position of the European Area ..is POSITIVE. Europe is NOT in the situation like the USA ..or the UK who can run away from big chunks of their Debts …

    So … WOLF … who owns that debt ?

    That is a very interesting Question !

    PS Beautifull dolls by Your FIL !

    • Feb 23, 2017 at 8:17 am

      Ole, the biggest buyer of euro denominated debt has been the ECB. Other big owners, including foreign: banks, hedge funds (they piled into euro periphery debt), insurance companies, and the like.

      The euro is also a reserve currency, and foreign central banks hold large amounts of euro-denominated debt in their foreign exchange reserves. Euro-denominated debt is everywhere.

      As an aside, other countries, including Mexico, have issued euro-denominated debt that is unrelated to this issue except in one way: it needs to be serviced in euros.

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