Posted on July 19,
2016 by Yves Smith
As readers may recall, Italy
has been trying with no success to get the ECB and European banking authorities
to allow it to rescue its banks. Unlike banks in most other European countries,
Italy’s got sick the old fashioned way: by lending to businesses in its own
market, and then having the loans go bad, in large measure to how lousy the
post-crisis economy has been.
New Eurozone-wide banking
rules took effect in January. They require bank bail-ins as the remedy for sick
banks, with only narrow exceptions. “Bail-in” means wiping out shareholders,
and then wiping out bondholders and converting bondholders to equity holders to
the degree that you now have a bank with a decent equity cushion.
That might sound sensible,
except in Italy, many banks defrauded depositors by persuading them to buy
bonds that are junior enough to put them first in line in a bail-in, by telling
them those bonds were just as good as deposits. So bail-ins would hurt and
potentially wipe out a lot of retail savers. That would not only damage the
economy in a serious way, but it would also create political havoc. Premier
Matteo Renzi is already at risk of losing to Beppe Grillo’s Five Star movement
in elections this fall. Bail-ins would seal his fate. Five Star has vowed a
referendum on exiting the Eurozone. Given that the currency union has become an
economic hairshirt for Italy, a referendum is seen as having good odds of
passing
One would think the foregoing
would motivate the Eurocrats to cut Italy some slack, and Renzi has made
several cases as to why Italy should get a waiver. Commentators at the
Financial Times are sympathetic. From an article last week:
Wriggle room was an issue much
debated by investors in Europe’s banks this week: can Italy use as much as
€40bn of public money to help its banks when the aim, if not the fine print, of
EU rules is that it should not?
The question is pressing
because Monte dei Paschi di Siena, the world’s oldest bank, may fall short when
regulators this month assess its ability to withstand losses. Estimates for how
much capital is needed range from €3bn to €6bn, after finding a buyer for
perhaps €20bn of loans gone bad.
A cascade of problems could
follow from the knock to confidence in the Italian financial system. The
prospect of merging strong banks with weaker ones could fade. Retail investors,
who the International Monetary Fund estimates own a third of the €600bn of
bonds issued by Italy’s banks, may panic at the prospect of losses.
Yet the authorities have
ignored Renzi’s pleas. But has the European Court of Justice given Italy a
reprieve? From Reuters (hat tip Richard Smith):
European Union member states
are not obliged to make shareholders and junior creditors pay before
intervening to rescue a bank, the EU top court said on Tuesday.
EU rules imposing losses on bank
creditors before a bank bailout were considered legal by the Luxembourg-based
European Court of Justice in its ruling over a Slovenian banking rescue.
However, the rules are not
binding on member states, the court said in its ruling that slightly limits the
European Commission’s antitrust powers amid talks for an Italian banking
bailout. The court said that burden-sharing by shareholders and subordinated
debt holders was not a precondition for granting state aid to a troubled
lender.
[…]
No comments:
Post a Comment