C&B Notes

Italian Bank(ruptcy) Prospects

Italian prime minister Matteo Renzi has been trying to shore up his country’s teetering banks, including creating a government-supported fund intended to channel private sector money into these financial institutions.  The long-term prospects of this plan are dim given the large amount of troubled loans (probably underestimated) on these banks’ balance sheets and the modest size of the fund.  Will Renzi and other Eurozone bureaucrats be able to contain the potential contagion that Italian banks pose to other EU members?

Last week, banks and insurers pledged €1.6bn in new money to Atlante 2, a fund set up by the Italian government to channel private sector money into rescuing the banks.  The fund has backstopped capital raisings at the country’s weakest banks and should be enough, for now, to tide over Monte dei Paschi di Siena, Italy’s third-largest lender and the worst performer in July’s European-wide stress tests.

This will allow the Renzi government to sidestep, temporarily, its most pressing dilemma: whether to use public money to bail out MPS, and fall foul of Brussels’ rules, or let the bank’s bondholders, including thousands of small retail investors, take the hit.  Who knows what arm-twisting by the government persuaded contributors to stump up money for Atlante.  Some pension funds balked at the last minute, but enough corporate allies were leaned on to get it out of a tight hole. It may be enough to soothe the market for a while but Atlante will not provide a longer-term solution.  MPS’s woes are symbols of a wider malaise.  The sector is weighed down with €360bn of problematic loans, equivalent to a fifth of gross domestic product, and Atlante has neither the firepower nor the tools to address a challenge on this scale.

The problem is not just an Italian one.  The Centre for Economic Policy Research suggests that, for the EU as a whole, non-performing loans were more than 9 per cent of GDP at the end of 2014, equivalent to €1.2tn and more than double the level in 2009.  The reason the numbers have deteriorated, in Italy as in the rest of the eurozone, is because bad loans are the iceberg above the water. Under the surface lurks a bigger problem: a persistent lack of economic growth.  Italy inched out of recession last year but the International Monetary Fund recently estimated that its economy would not return to pre-crisis size until 2025.  Thousands of small and medium-sized companies have gone under, taking with them the bank loans on which they depended, as well as demand for lending.  The banks’ challenges do not just affect Italy’s economic prospects; they have the potential to derail its political future.

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They will want to do so because, like much of the voting public across Europe, they are fed up.  The economy is growing too slowly to deliver much tangible benefit.  Meanwhile, the electorate is distracted by endless stories about corruption in the political elite.

The bank saga has contributed to this sense of sleaze and backroom deals between politicians and business.  MPS, backed by local dignitaries and already bailed out twice after fraud and mismanagement scandals, is one aspect of this sorry tale.  Others include the wiping out of junior creditors in four small banks last December.  Many voters believe the government helps business to the detriment of small savers, a narrative given heft by the suicide of an affected pensioner, and the fact the vice-chairman of one of the banks in question was the father of a cabinet minister.