Well, that didn’t take long. And whatever happened to the Eurozone’s new bail-in rule?
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
Italy’s government, in its eighth month in power, has already bailed out a bankrupt bank, mid-sized Banca Carige, with public funds. If approved by European Commission and the ECB, it will be the fourth Italian bank rescue in just over two years. As Italian daily Il Sole 24 Ore points out, Italy’s populist government has adopted virtually the exact same playbook to save Carige that was used by its predecessor in the previous three resolutions:
The draft of the new Carige decree is a carbon copy of the one used by the Gentiloni Government for the bailouts of Monte dei Paschi di Siena (MPS), BPVI and Veneto Banca — identical in every detail from the rules on state guarantees to the mechanisms adopted…
It took just eight minutes for Italy’s coalition partners, Five Star and the League, to renege on their flagship promise never to bailout a bank, reports Bloomberg. The new decree will allow the government to guarantee Carige bonds up to a maximum value of €3 billion, making it easier for the lender to retain access to the funding market. The government also wants the option, if necessary, to recapitalize the bank by injecting as much as €1 billion into its coffers despite having lambasted the previous government for doing the exact same thing with MPS.
It’s not yet clear whether the proposed rescue of Carige will contravene EU state-aid rules, which are supposed to impose strict conditions on the “precautionary recapitalization” envisaged by the government. Carige is already under the administration of ECB-appointed administrators after failing to agree to a €400 million capital increase at the end of last year. So if there are any issues it should be easy for European Commission or the ECB to stop the bailout dead in its tracks.
In the case of the two Venetian banks, BPVI and Veneto Banca, the ECB’s Single Resolution Board decided the two lenders weren’t eligible for a bailout. Instead, the banks were forced into a last-minute takeover by Italy’s second largest lender Intesa. Nonetheless, €17 billion of public funds were used to bail out senior bondholders and depositors, including a €5 billion capital injection for Intesa which picked up the Venetian bank’s good assets and took on its liabilities, such as deposits.
Junior bondholders did face losses in the operation but Italy’s current government has promised to return money to bank investors that lost their shirts in recent years. Its hotly disputed budget for 2019 includes a €1.6 billion fund to compensate retail junior bondholders and even shareholders up to, respectively, 95% and 30% of their initial investments.
Ratings agency S&P has already given the government’s bailout of Carige its seal of approval, arguing that it should help to stabilize Italy’s last remaining troubled mid-sized lender. A similar thing was said following Intesa’s rushed takeover of the Venetian banks. Considering Carige’s market share represents just 1% of Italy’s banking sector, the bailout is unlikely to have important implications for Italy’s banking sector, S&P said.
But it could besmirch Italy’s populist government, which in opposition had repeatedly blasted its political foes for using scarce public funds to help out bank bondholders. More important still, if a bank as small and as non-systemic as Carige can be bailed out with public funds, what does that mean for Brussels’ much-vaunted bail-in legislation, which was supposed to put an end to taxpayer-funded bailouts by allocating losses to shareholders and certain bondholders?
Since becoming law on Jan 1 2016, the EU’s bail-in rule has only been used properly once, to resolve Spain’s Banco Popular in June 2017. It was a very different script. The ECB’s Single Resolution Board (SRB) deemed the lender was “failing or likely to fail.” Within no time, Popular’s shareholders, who’d been repeatedly suckered into handing Popular fresh funds in numerous capital expansions, were unceremoniously wiped out. Also taken to the cleaners were holders of Popular’s riskiest bonds, its AT1 bonds and AT2 bonds, or CoCo bonds.
The bank’s senior bondholders and depositors were spared while the bank’s assets, including a massive portfolio of small-business clients, were handed to Banco Santander, Spain’s biggest bank, which also took on the banks liabilities. Santander had to set aside €7.9 billion to plug Popular’s remaining balance sheet holes, most of which of which was raised in a fresh rights issue.
Popular’s demise marked the first time under the EU’s Bank Recovery and Resolution Directive that shareholders and subordinate bondholders of a European bank had not been bailed out by taxpayers, although Santander did receive tax credits in its shotgun takeover. The fact that financial markets had received the “bail-in” of Popluar’s investors calmly seemed to suggest that investor bail-ins were the route to go in future bank resolutions. As I averred at the time, perhaps the Eurozone’s banking authorities were finally growing some teeth. I was wrong.
And German authorities, rather than kicking up a fuss about the Italians bending EU bailout rules, are likely to look the other way. They have enough problems in their own banking sector to worry about, including troubled Deutsche Bank. By Don Quijones.
Eurozone companies feel the pain as euro junk-bond yields have more than doubled. Read… ECB Ends Corporate Bond Buying, and Look What Happens
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Don,
Many thanks for this piece.
Agreed that the authorities will conveniently “look the other way” for the most part.
Europe facing a brutal 2019. Rising interest rates now that the ECB has ended its money laundering. Appears that recession is underway so tax receipts are going to take a hit. The euro should weaken substantially this year. If so, then the Swiss will have to debase the franc further to keep pace.
Now let’s see if yellow vest fever goes viral across the Continent.
To start with Yellow Vest could start targeting all banks (all their offices, bankers, central bankers, politicians who support the bail out) that get bailed out instead of retailers. Target anyone who asks for bailout or takes it and anyone who offers it.
It is time investors pay up when the risk misfires. It is as simple as that. Yellow vest movement should start targeting the “socialize losses, privatize profits” programs that is popular with the bankers, central bankers and politicians.
There are rumblings on yellow vest social media about organizing intentional runs on banks… things may get more interesting yet!
I don’t think the “yellow vests” have enough money to make a run on a bank, never mind banks. Kinda what they are being angry about!?
Run on the banks (as it is understood) was organized by the ECB honchos. Who in their addled mind would keep money in the bank, and pay the bank for the privilege.
I’m very shocked to find that populist politicians lie. It’s probably only European populists…
But, thanks, Don, for the insights.
Lol
Yeah, it’s “populist” politicians that lie; NEVER establishment politicians, right? LMFAO
Very Few established politicians straight-up lie.
Those are experienced and smart enough to arrange their wordings to be strategically misunderstood in the direction they want them to be. One has to carefully parse the actual words used in what they really did say more thoroughly than the typical journalist or blogger can manage to condense into a single (spam-bait) headline.
With practice this becomes easier. One also (grudgingly) must admit that politics *is* a skilled trade and some of the people in that trade are really good at it.
They bail out the banks because the alternative is worse…..for everyone.
No, it’s not. Society can survive banks failing. We would all be in much better shape if they were allowed to, as it would put pressure on banks to actually make sure their assets were secure and they weren’t being reckless. Nonstop bailouts = no incentive for them to NOT pass losses onto taxpayers.
For whom? Italy, like all other civilized countries, has well defined laws dealing with insolvent banks. They were put to good effect in 1982 when the old Banco Ambrosiano was liquidated after accumulating losses worth $1.2 billion (in 1982 dollars!). I was just six back then but I don’t remember any particular calamity tied to this event: my paternal grandparents had a deposit in the old Ambrosiano and didn’t lose a lira. They were even given a choice of where their new bank account was to be domiciliated among a choice of six or seven banks.
No: this is yet another bailout for Italy’s real estate and construction industry (which at last check was worth over 60% of bad loans) and especially for junior bondholders, a politically powerful class which is always one of the very first to be wiped out in case of a debt restructuring deal.
This new Italian government has shamelessly courted this particular class, for example by instituting a hazy “fund for victims of banking frauds”. It’s interesting to know that according to existing laws buying junior bonds from shaky banks because they carry more yield is not considered a form of “fraud” and that if a court finds somebody has been defrauded he should be paid reparation money by the culprits, not the taxpayers.
Regarding real estate… the wheels may not have fallen off the wagon yet, but they are getting a whole lot shakier. The beating on the pans has already started and when has a government ever been deaf to it?
Stockholders and bondholders losing their investment when a bank gets resolved is not “worse… for everyone.” It’s worse only for those investors. But that’s the risk they took and got paid to take when they invested in this bank.
we’ll see if that applies to the resolution of Deutsche Bank when it comes… Certaingly the ECB has done ‘much’ to protect bondholders at the neck of ordinary citizens… c.f. Greece. Why shouldn’t THOSE sovereign bondholders be wiped out?
“They” don’t take risk… but instead everyone else gets “austerity”
Meanwhile the ECB has bought the Sovereign Debt of every part of the Yield Curve and more… ad infinitum. THEY are the investors in sovereign risk… yet they take no risk.
…oh, that sounds fair.
Well if it is we WANT TO SEE IT!
You take risk YOU pay price! Simple as that.
Same as staying on crack is better than detox, because detox hurts.
If a failed bank is an worse alternative for society then society should own and manage the bank. Is that what you are really sayiing? That you are a closet socialist (commie, pinko, Marxist, Leninsit, Trotskite) in the clothes and words of a capitalist? Or maybe the shareholders and bondholders of the bank take a loss on their investments, and the operations, and the depositors and the borrowers are absorbed by someone who can actually run a bank.
So what happens to the Italian rconomy if banks stop being bailed out?
It becomes roadkill. Italy is one of those countries where nothing ever really gets resolved because that would inconvenience too many special interests. The “technical debt” is enormous.
In addition, once bondholders figure out that there are risks involved in investments, interest rates will go up because then they want to be paid for those risks – unless the ECB buys Everything. The ECB being unwilling to do this any longer could be why “we” ignore the rule breaking for the moment, with Brexit, new incoming head of ECB and all.
It is not unlikely that, after Brexit is finally done, and there is time to deal with it, Italy will end up in much the same situation as Greece.
Probably stupid to try to manage national finances and banking when it’s all in someone else’s money.
Hi DQ, has there been any banking run ref Carige Bank? If you had money in the bank id pull it out.
There has been a well defined “capital outflow” from Italy over the past six months but it’s impossible to know who is pulling out money from the system.
While I often hear the phrase “capital run” thrown around I suspect it’s mostly foreign capital being repositioned: the Italian economy has slowed down rather dramatically (no recession, remember) over the past six months despite monetary stimulus being in full swing and Italy in a stagnation is a bad place to be for foreign capital, especially given the high level of entitlement of local voters. Those entitlements have to be paid somehow, as the present Santa Claus Party is learning.
If you are an ordinary person however you have nothing to fear: while your deposit is insured by the State and you won’t lose a single euro, junior bondholders have already started to beat on their pans. They have been beating on them for a decade now, as they have learned they always get what they want and not what they deserve.
Except if Euro goes to wherever? Even in Cyprus ordinary deposits were in sight for a while if I remember, probably just to put the wind up, capital controls in Greece for several years, empty atms???
But hey, Italy has Spain for an example now, the economy is doing so well that a projected @ 2% in gdp increase for 2019 is going to bring in almost 10% more government revenue. Nice word that, revenue, sounds legitimate. So it’s spend spend spend, Damocles is Damocles’ problem, we are not Damocles, definitely not Damocles, Damocles was a wimp.
The fundamentals. When the eu was set up were unrealistic for certain countries including greece and Italy
Further being tethered to the eu makes it problematic to compete price wise on exports.
This is not t say there aren’t some benefits re eu.
But trying to keep pace with the US is not realistic.
Canada has its own structural flaws (although we have fewer banks…but Canada was in denial regarding our own banks liquidity props.)
One size fits all is not the best fit for most countries
Including Canada, including eu member states including Canada’s pontificating re what developing nations should and shouldn’t do.
The US has the ability still to steer it’s own fate not so many other countries including eu members….but individually again a trade off in potency in bargaining positions. Interesting times
I believe the EU was set up for the sold benefit of Germany. This is how you take over Europe without firing a single shot. Great work when you can get it.
Just look at the trade surplus Germany runs with nearly all EU members. Problem is even Germany is running our of other members money. I believe this is why the deficit to GDP limits are rarely enforces. Who would Germany import its goods to. China, please. Russia, too small. MEA, too unstable. Kinda just leaves the good ol US of A stooges.
It was said on every bond and fx trading desk in the City of London and Wall Street in the 1990s.
“What two World Wars didn’t accomplish, the EU will”
And Worth going back in time to when Italy encourages d construction but failed to dot the I s hence those unfinished construction builds dotting middle Italy.
And of course the impact of globalization that destroyed historic market gardens and artisinal industries replaced with mega factories in the 1980s. Which now are semi abandoned due to industrial processes moving to emerging markets
What might help reset the dial is if the pressures on some of these other currencies were revalued upwards rather than kept artificially low to enable the present western status quo….which would provide the incentive Trump keeps looking for to reverse deindustrialization…
Maybe I m being stupid now,but can the bailed in when Cyprus banks blew up SUE the authorities/ regulators,for being treated differently than Italian s
I think Italy’s going to get away with bailing in Carige. Germany will let them do this because they’re going to want to be able to point fingers when they start bailing in Nord and DB this year.
Spain should be screaming on every media site about how they got screwed playing buy the rules and how they’re going to take their ball home and leave the Euro.
“Meet the new boss, same as the old boss.” — The Who