I hope everyone here had a great Christmas. I have a lot to cover in the next fortnight as 2017 may be the crunch year for the global financial system – but more on that later.
This current piece is an update to my previous post on the Italian Banking System (/forums/topic/economic-options-for-italy-before-the-2016-referendum/) and the ECB crises ( /forums/topic/why-the-eus-fiat-currency-system-must-fail/)
After the recent Italian Constitutional Referendum saw the resignation of Prime Minster Matteo Renzi in Nov 2016, the new Italian cabinet led by Prime Minister Paolo Gentiloni agreed on 23rd Dec 2016 to plow as much as 20 billion euros into the Italian Banking System – using a loophole in the European Central Bank (ECB) rules to avoid having to “bail in” bond holders and savers. A desperate measure to save a banking system that appears unworkable.
Italy’s banks hold about $383 billion in non-performing loans (NPF) in 2016, about one-third of the entire Eurozone – a 100% increase since 2011. The government support of bad bank loan practices is now reaching the expected outcome of a system freeze or collapse – unless the banks urgently reduce debt levels to the ECB allowed norms to avoid capital flight and bank runs.
Italy is problematic for many of the same reasons that Greece, Spain, and Portugal are. Bank customers in these southern EU states borrowed to buy goods from the wealthier north, mainly from Germany while export markets did not materialise -and then the economic growth they anticipated failed to occur. The purchased goods have mostly been consumed, so there is no collateral to recover. Many loans look like near-total losses. Plus there is systemic bad lending practice, lack of controls and lack of accountability that the past Italian governments have ignored or supported.
Italian banks can either call the loans in, forcing the borrowers to pay or declare bankruptcy and possibly only recoup 40% of the face value of the loans. Or sell the bad loans to a third party to only get 20% of the face value. This would reduce the bad loan portfolio, but it would also require a bank bail-in for the remainder of the debt . The ECB’s new rules introduced in 2015 say that if a country’s government bailed out a bank, then the investors (e.g., holders of the banks stocks and bonds) would have to be “bailed in” and lose a percentage of their investments. This the Italian government cannot afford without triggering a political and economic disaster.
Since the banks are still technically solvent, the government’s cunning plan is to call the cash injection bailout a “precautionary recapitalization” allowed by the ECB rather than a bail-in. Since the ECB limits the injection fund to stop misuse of this scheme – the bailout is nowhere near enough to save one bank, let alone Italy’s banking system.
The EU’s banking union currently provides three levels of rules. None have been actually tested in practice.
Crisis Prevention: Under ECB supervision requiring banks to pass “stress tests” on a regular basis
Early Intervention. If an institution’s situation begins to deteriorate the ECB can force the bank to adopt urgent reforms, because the crisis worsens.
Crisis Management. If the financial situation of a bank deteriorates beyond repair, the ECB can provide a partial bailout from a fund to which all EU banks contribute. A “bail-in” process would be used to determine who is going to lose their money to save the bank. Authorities would first write down all shareholders and other holders of instruments such as convertible and junior bonds. Deposits under 100,000 euros are currently protected, and taxpayer money is not allowed to be used.
Usually, anyone who invested in stocks and bonds would have to be considered a “sophisticated investor.” However thousands of ordinary people, including many elderly savers, who wanted to deposit their money in savings accounts instead were sold bank bonds indiscriminately and fraudulently on the pretext of higher rates of return. A bank “bail-in” in Italy will actually cause tens of thousands of people to lose their life savings.
Italy’s government followed these bail-in rules last year to save four banks, but 130,000 people had their savings wiped out, and the related suicide of a 68 year old pensioner become politically explosive.
The government has been severely tested by the following case – which proves the eventual capitulation of the Italian banking system to bail-ins is not far away:
The rescue of troubled lender Banca Monte dei Paschi di Siena SpA (BMPS) on 23rd Dec 2016 under this indirect bailout scheme is costing the Italian Treasury about 6.6 billion of a total 8.8 billion euros in liquidity demanded of BMPS by Brussels under the bail-in requirement – including 2 billion euros to compensate around 40,000 retail bond holders affected under the bail-in, while the rest will come from the forced conversion of the bank’s subordinated bonds borne by institutional investors.
MPS has €55.2 billion in bad loans and three weeks ago said that it had enough funds to stay afloat for 11 months. Last week, this changed to 4 months. It’s believed that the rapid deterioration is being caused by a run on the bank.
BMPS’s stock price has fallen 80% in the last year, and fell a further 14% this July, following the ECB “ultimatum” to reduce its bad loans portfolio to $32.2 billion by 2018 to meet the 60% NPL-to-GDP ratio.
It’s known that from June to September 2016 customers removed deposits of €6.7 billion, and it’s believed that this run on deposits is continuing, or even accelerating and spiraling out of control.
BMPS had plans to issue 15 billion euros ($15.8 billion) of debt next year to restore liquidity and debt sales would be supported by government guarantees.The European Commission said that it will work with Italy to assess whether the planned capital injection into Monte Paschi is within EU state-aid rules.
However BMPS is still unable to find backers and on 29th Dec 2016 bank trading has been suspended.
It appears that other Italian banks are not far behind. Unicredit, which is even larger than Monte dei Paschi, intends to raise €13 billion early next year. This is not expected to succeed as well and a bail-in is likely.
Finally – Italy is a key player in the EU banking system and the contagion of bad debt default will spread quickly to the primary lenders – who now have similar banking problems.
The total exposure of French banks and private investors alone to the €2.4 trillion Italian government debt exceeds €250 billion or 10%. Germany holds €83.2 billion worth of Italian bonds. Deutsche bank alone has nearly €12 billion worth of Italian bonds on its books. The other banking sectors most at risk of contagion are Spain (€44.6 billion), the U.S. (€42.3 billion) the UK (€29.8 billion) and Japan (€27.6 billion).
All of which helps to explain why banks and their representatives at the IMF and the ECB are frantically demanding a no-expenses-spared Italian taxpayer-funded rescue of Italy’s banking system.
It does not appear that the ECB rules will allow anything other than a ball-in to occur to contain the problem in order to protect against debt spillover. However the collapse of the Italian economy under the stress seems very likely – with a Greek no-solution the expected end result for Italy.
Citations
http://uk.reuters.com/article/us-eurozone-banks-italy-montedeipaschi-idUKKBN14J0J8
https://www.bloomberg.com/news/articles/2016-12-30/paschi-rescue-to-cost-italy-6-6-billion-euros-central-bank-says
http://www.breitbart.com/national-security/2016/12/28/28-dec-16-world-view-bank-run-worsens-italys-banking-crisis/
http://www.generationaldynamics.com/pg/xct.gd.e160705.htm#e160705
http://www.truth-out.org/news/item/38853-the-italian-banking-crisis-no-free-lunch-or-is-there
Y_ 3 years ago.
