Despite the Hype, Italy’s Banking Crisis Metastasizes

The government’s giant debt is already “vulnerable to market turbulence.”

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

For the last five months, Italy’s third largest bank, Monte dei Paschi di Siena, has been locked in talks with the Italian government, the European Commission and the ECB’s regulatory arm, the Single Supervisory Mechanism, over the design of a taxpayer-funded rescue. The negotiations have no led to a preliminary rescue deal, prompting speculation that Italy’s banking sector may finally be on the mend. But the progress has been painfully slow and as time drags on, the deep-seated problems affecting Italy’s broader banking system continue to metastasize.

Bank of Italy Governor Ignazio Visco warned on Wednesday that weaker Italian banks that will probably have to sell off large chunks of their non-performing loans could face additional write-downs of around €10 billion.

“If they were sold at the very low prices offered by the few large specialist debt collection agencies active in the market today which pursue very high returns, the amount of additional write-downs would be in the order of €10 billion,” Visco said at the central bank’s annual meeting in Rome, which was attended by his predecessor in the role, Mario Draghi. Italy’s most troubled banks, those that could be forced by regulators to write down loans, currently hold €20 billion in bad loans net of write-downs, Visco added.

But €20 billion also happens to be the amount the Italian government set aside at the beginning of this year to bail out the entire banking system – not just a few of the worst-off banks. It’s unlikely to be enough.

Spain needed to spend around €300 billion of state funds (both explicit and implicit) to steady its banking sector during the country’s financial crisis. Even after that, Spanish banks are not out of the woods, as exemplified by the worsening trials and tribulations of Banco Popular.

As with Spain, once the bailout of Italy’s banks begins in earnest, the amount of public money needed to save the system is likely to mushroom. And in a country that already boasts the third largest public debt-to-GDP ratio on the planet and whose GDP is not forecast to return to its 2007 level until halfway through the 2020s, that could be a major problem.

As even Visco concedes, the scale of Italy’s debt reduces the State and financial intermediaries’ room to maneuver, making the Italian economy more “vulnerable to market turbulence,” particularly if the only remaining buyer of Italian debt, the ECB, begins withdrawing from the market. Italy’s five-year default probability has risen to 4.4%, almost double that of France.

An even more urgent problem is finding a way to bail out the banking system without setting off a tripwire or two. That will require “extremely prompt and decisive action, close cooperation among all those involved, and the clear definition of responsibilities and priorities,” says Visco, none of which is easy to achieve in a 19-member currency union run by a plethora of competing multiple, mutually independent authorities and institutions, both national and supranational. As Visco himself concedes, in the Eurozone “effective coordination is lacking.”

That’s putting it mildly.

This week, after five months of deliberations, Monte dei Paschi di Siena was given the green light to begin offloading €26 billion of bad loans onto the books of Atlante II fund, one of two bad bank funds created to provide support for Italy’s crumbling banking sector (the other being its predecessor, Atlante I). Both funds are operated by the opaque Luxembourg-based boutique asset management firm Quaestio Capital Management.

The non-performing loans will be securitized and transferred to an ad hoc vehicle at a value close to 20% of their face value, reports the Italian financial daily Il Sole 24 Ore. The assets will be divvied up between the Atlante rescue fund and interested private investors, who apparently include US private equity fund Fortress and Italian bad-loan manager Credito Fondiario, in which US fund Elliott has a 44% stake. Another €3.3 billion of senior debt, backed by state guarantees (GACS), will be sold on the market.

MPS has set a June 28 deadline for the talks with Quaestio. If the transaction is completed in time, €8.8 billion of public funds will be released to plug MPS’ gaping capital shortfall. Once that’s done, Italian taxpayers will own around 70% of the world’s oldest bank and a full-blown bail-in of certain bondholders will have been averted.

The European Commission also said that retail investors who were mis-sold MPS junior bonds that were designed to be bailed in if the bank fails would be eligible for a taxpayer bailout.

All of this would be in direct contravention of the EU’s own rules on bank resolution if it weren’t for the inclusion of a handy get-out clause: if a bank is not deemed by the relevant authorities to be insolvent, it can be temporarily assisted with public funds without having to bail in senior creditors or depositors while junior creditors will be refunded by the newly state-owned bank. That means EU authorities effectively get to pick which banks get saved the nice way and which don’t.

As MPS’ chief “rescuer,” JP Morgan Chase, recently warned, the latter may soon include the two mid-sized Veneto-based banks, Banca Popolare di Vicenza SpA and Veneto Banca SpA, which are also desperate to avoid a bail-in but have been instructed by the Commission to find an additional €1 billion in private capital before taxpayer money can be used to save them.

That money will not be coming from either of the Atlante funds, which have already used up 80% of their capital removing billions of euros of toxic assets from the banks’ balance sheets, to no apparent avail, leaving the two Veneto-based banks and their government helpers little choice but to go cap-in-hand to rich investors in Italy’s north-eastern region in the hope they might take pity on their plight.

“We’re looking at businessmen from the Veneto area who would benefit the most from the banks’ survival and conversely would be the most damaged by their failure,” said Italy’s Finance Undersecretary Pier Paolo Baretta. This strongly worded appeal – some might interpret as a shakedown – is a powerful reminder of just how desperate the situation has become in the Eurozone’s third largest economy. By Don Quijones.

And still, years after the bailout of the Spanish financial systems, there’s Banco Popular, trying to find a savior. But that savior says the bank “itself cannot at this point make a rough calculation” of what its value is, “and if they can’t, neither can we.” Read…  Banco Popular’s Co-Co Bonds Plunge as Balance Sheet Chaos Revealed in Potential Forced Sale

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  22 comments for “Despite the Hype, Italy’s Banking Crisis Metastasizes

  1. rhs jr says:

    Europe’s banks remind me of kids heating a gas can (fiat debt) and then screwing the lid on tight (the Minsky Moment).

    • TJ Martin says:

      … and you think our banks are any better ?

      • JMiller says:

        Yes TJ. In general U.S. banks are in better shape than the European banks. The average Texas Ratio for U.S. banks is around 10 while the average Texas Ratio for European banks is around 50 with Italian banks being among the worse.

  2. d says:

    They EU Authority’s have to bail in several smaller italian banks after this Very Eu fudge, of the bail in regulations, to retain credibility.


    “The European Commission also said that retail investors who were mis-sold MPS junior bonds that were designed to be bailed in if the bank fails would be eligible for a taxpayer bailout.”

    Has finally been resolved in favor of the retail bond holders, after being a Major stumbling block since day 1.

    I would very much like to know what the price was.

    Perhaps the full bail in of the next 2 Italians on the list??

    The stance against them defiantly seems to be hardening.

  3. walter map says:

    There’s your World Government. It doesn’t call itself a government and isn’t organized like one, but they certainly do rule.

    Some background:

    What price the new democracy? Goldman Sachs conquers Europe

    The ascension of Mario Monti to the Italian prime ministership is remarkable for more reasons than it is possible to count. By replacing the scandal-surfing Silvio Berlusconi, Italy has dislodged the undislodgeable. By imposing rule by unelected technocrats, it has suspended the normal rules of democracy, and maybe democracy itself. And by putting a senior adviser at Goldman Sachs in charge of a Western nation, it has taken to new heights the political power of an investment bank that you might have thought was prohibitively politically toxic.

    Don Quijones has touched on the role of GS before, of course:

    Goldman Sachs Just Launched Project Fear in Italy

    Goldman’s report has one main purpose: intimidating Italy’s electorate into following the government — and EU — line. Failure to do so would be tantamount to economic suicide, since it would trigger the collapse of the banking system and the mass destruction of billions of euros of Italian household wealth.

    It’s a familiar pattern: get Goldman Squid insiders in to run the country, load the country up with debt, and then turn the screws until the country coughs up billions for the banksters.

    Greece was just for practice. Puerto Rico was for sport, and they’re even targeting Iceland again. They’re well on their way with the U.S., and it’s mighty military is helpless against them.

    Have fun with this:

    • John says:

      Lots of education in there, but alas few will care to get enlightened.

    • Exactly right. The US banksters have been doing this for decades. Sounds like you’re familiar with the book Confessions of an Economic Hit Man. The only reason the US entered WW I was because the banksters were worried their loans to the UK and France would go unpaid if the Germans prevailed. Talk about blood money. As long as it’s still money the banksters don’t mind.

  4. Gershon says:

    I keep watching the Italian 10-year bond. It that soars to 6% or more, I expect the wheels are going to come off the bus.

    Spain and Italy are too big to be bailed out. If they default, it’s game over for the Eurozone’s financial house of cards.

    • nick kelly says:

      Good point. Related point- if Germany goes back to the D-mark, the US$ is instantly dethroned as most desired currency.
      Back in the days when the Fed had to raise its rates to 20% to defend the dollar, it was gold, silver, the D-mark and the Swiss franc everyone was piling into.
      The Swiss franc still has this problem- their central bank has gone through all kinds of antics to try and lower the value- even tried a peg for a while. (Funny trivia- when their minister of finance was mulling dropping the peg to the euro, he mentioned to his girl friend, who speculated on it!. He resigned)

      But the Swiss economy and ‘float’ is too small to be a competitor for the dollar.
      When the D-mark ruled the roost, German industry screamed loud, but the Bundesbank is constitutionally independent, and ignored them.

      It would actually be a break for US industry, especially autos, but it might cause US interest rates to rise faster.
      Also, the inner core of the EU is the two old combatants, France and Germany. The whole EU idea originated with French and German survivors of WWII, and its reason for being above all is the prevention of another European war.
      And although Germany can’t bail out everyone, France by comparison with Italy, Spain and Greece, is not in that bad shape. And unlike Italy there is no big movement in France for a return to the French franc.

      So more likely than a D-mark, is a ‘north’ euro zone with Germany, France, the Netherlands and whoever else is solvent.

      If you wanted to exaggerate you could say this euro would make US finances look like a house of cards.

      • d says:

        The northern Euro concept has been kicking around since the first euro crisis. Nobody gives it to much support as it dosent advantage the taker states France ,Club-Med, greece and various eastern euro states.

        It was originally first published by Soros An evil man but not a completely stupid one. It was in discussion on various FX forum’s, (Including ours) before he published it.

        The taker states are again Barking, we must have a Euro bond and a Euro treasurer.

        A Euro bond, is not possible, until the TRUE, bank NPL, State debt, Bank capital, and State budgets, come into sync. All across the Zone. With greece remaining in the zone that’s decades away.

        As the states that do live within their means, are tired of subsidising the Taker states, that refuse to.

        The euro was a good concept, that ran to far, to fast. It now has to many taker States in it, that wont abide by the rules. so prevent any further progress.

    • paolo says:

      I tell you what…i am following the 10yrs BTP and at the right time short it with a 7 leverage….

  5. AC says:

    The non-performing loans will be securitized and transferred to an ad hoc vehicle at a value close to 20% of their face value, reports the Italian financial daily Il Sole 24 Ore.

    This sounds vaguely familiar. Should end well.

    One might suspect that this suggests that the underlying properties are realistically worth perhaps 20% of what they have been selling for, too.

  6. Chris Wagner says:

    Super Mario tries to convince the sheeple that irrespective of which government or country issued the debt, the EU should be viewed as “one entity”.

    Bernard Connolly should write a sequel to his superb book “The Rotteh Heart of Europe”.

  7. Maximus Minimus says:

    Meantime, the action today seem to have shifted to Banco Popular, which DQ covered just a few days ago. It is like a fast action movie.
    Quote from ZH:
    “Meanwhile, the government urged citizens to keep “complete calm”, and not to sell because, get this, the bank “passed its stress tests.” Alas, “passing stress tests” did not help either Bankia or Dexia, two other famously insolvent European banks.”

  8. randombypasser says:

    Chinese ‘investors’ saved US premier housing market, big time if i’ve understood correctly, maybe some more.
    And which participant is probably the only one who maybe can, will and do save the Italian and Spanish banks? Dunno what aces magician Mario(nette) might have in ‘is sleeves, if any anymore, but Chinese ‘investors’ might have few aces and Joker’s before the Big Lady sings.
    Sun rises from east, but for who?

  9. Maximus Minimus says:

    Oh, so much to do, and all the main actors are sipping champagne at the Builderberg’s.

  10. Stevedcfc72 says:

    Is it me or are the stress tests a complete whitewash. How Monte De Paschi-the two Veneto Banks pass the stress tests I’ll never know. As for Banco Popular, not even any of their other Spanish Banks want to touch it now as they’ve realised there is a far bigger black hole than a 4 billion pound liquidity requirement. Question for the forum when is a bad debt recognised in a banks financial statements? Is it only when for example the asset is sold?

    • d says:

      “Is it me or are the stress tests a complete whitewash. ”

      There were articles on this site and other they were in fact a complete white wash.

      Which is why Euroland has another round of imploding bank’s.

      • Stevedcfc72 says:

        Thanks D for the reply. There is a possibility of contagion within Spanish Banks.

        What’s interesting from a Spanish point of view banks is that if you look at the other banks in Spain aside of Santander (Banco Popular for obvious reasons, Bankia, BBVA, Caixabank, Sabadell and Bank Inter to a point) in the first quarter of 2017 all have seen bank deposit reductions of 2% to 5% of total deposits.
        There is an over reliance on Santander to come to the rescue. If I was Santander I would run a mile from anything to do with Popular.

        • d says:

          “There is an over reliance on Santander to come to the rescue. If I was Santander I would run a mile from anything to do with Popular.”

          So would I.

          Deposit withdrawals.

          The rest of club-med is starting to experience what greece did, for similar reasons.

          Small capital flight, to non club-med banks. In non club-med countries.

          greek citicens have in foreign bank’s, more money that greece owes. As they fear greek bank collapses AND greece leaving the Eurozone.

          In the Eurozone with internet banking this is very easy to arrange.

          The situation for the club-med bank’s is worse than just the deposit withdrawals. The deposit base, should be growing, in sync, with the anemic economic performance, of the national economies.

          This sort of capital flight is like Tax haven banking. It NEVER, all returns, to the originating nation.

          The Citicens of club-med are staring to vote on their bank’s, with their deposits, do not expect a return to normal, until the club-med NPL issues, are fully resolved.

          Banks and currencies run on confidence, once that confidence is lost, They are Dead.

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