Courtesy of Mish.
Italy’s third largest bank by assets, Banca Monte dei Paschi is on the death bead. It’s been there since mid-2014.
Italian banks in general have €200 billion in non-performing loans. They have another pile of troubled loans that are late just some of the time.
To address the problem, Prime minister Matteo Renzi hatched a half-baked scheme dubbed “Atlas”. The idea was to leverage a mere €5 Billion to address a €200 billion hole.
As predicted, “Atlas” quickly died. Now, Renzi wants to use Brexit as an excuse to use state funds to bail out Banca Monte dei Paschi, but German chancellor Angela Merkel shot down that idea on Wednesday.
Please consider Matteo Renzi Rebuffed on Move to Sidestep Bank Bail-Ins.
An attempt by Matteo Renzi to use Brexit-driven market turmoil to secure EU approval for Italy’s plans to recapitalise its banks without triggering bail-in rules has been rebuffed by Germany and the European Central Bank.
“We wrote the rules for the credit system, we cannot change them every two years,” Angela Merkel, Germany’s chancellor, said on Wednesday in her first public comments since the Italian prime minister floated his idea on Monday.
It is the fourth attempt by the government since November to try to gain approval from the EU regulators to use state funds to bail out its banks. All previous attempts were watered down so they did not break EU rules.
The move reflects concerns in Rome about the potential of a bank crisis to unseat the government. Mr Renzi faces a constitutional reform referendum in October on which he has staked his political career.
Senior bankers are also concerned by how their banks will fare in stress test results, due to be published this summer, which might prove a trigger for another sell-off.
One senior diplomat in Rome described Mr Renzi’s move as an “attempt to hijack the EU meeting to fit his own political objectives that everyone saw coming”.
What is the Italian Problem?
Let’s turn our attention to an article from Tuesday to fill in some missing pieces: Why Renzi’s Latest Bank Rescue Matters Far Beyond Italy.
The strict EU rules against state-backed rescues took years to negotiate and are so new they have barely been tested in a crisis with a major bank. But they were an essential precondition to eurozone integration; without these guarantees Germany would not have accepted the risk-sharing involved in creating a banking union.
Nicolas Véron of the Bruegel economic think-tank said the credibility of the EU’s post-crisis rule book is on the line. “This test is bigger than any than banking union has already passed,” he said.
Concerns are focused on the banking sector’s €200bn of gross non performing loans, known as “sofferenze“, of which about €85bn have not yet been written down. The bad loans, built up during Italy’s three-year recession and a decade of stagnation, are weighing on the banks’ already weak profitability and limiting their ability to lend.
Italian politics also plays a part. Banca Monte dei Paschi di Siena, Italy’s third-largest bank by assets, is facing the biggest difficulties. It happens to have close ties to Mr Renzi’s centre-left Democratic Party. Any restructuring would hit influential creditors and thousands of retail investors.
For Italy, the question is whether a capital injection will ultimately address the deep malaise of 600 banks that operate on a business model that may no longer be viable.
“Ultimately to solve the problem losses will have to be allocated, there will have to be closures and mergers and fewer branches. Whatever happens this needs to be done,” said one European regulator familiar with the discussions. “Just fiddling with the rules won’t make this go away.”
Italian Banks Achilles Heel of the Eurozone Financial System
