Italy’s finance minister, Pier Carlo Padoan, wants to “ringfence” its troubled banks.
Padoan called a meeting of the executives of Italy’s troubled banks in Rome on Monday. The banks allegedly will come up with a “Last Resort” bailout fund.
Last resort or first resort, is there a difference at this point in time?
Please consider Italy Pushes for Bank Rescue Fund. I highlight the key buzzwords and phrases italics.
Finance minister Pier Carlo Padoan has called a meeting in Rome on Monday with executives from Italy’s largest financial institutions to agree final details of a “last resort” bailout plan.
Yet on the eve of that gathering, concerns remain as to whether the plan will be sufficient to ringfence the weakest of Italy’s large banks, Monte dei Paschi di Siena, from contagion, according to people involved in the talks.
Italian bank shares have lost almost half their value so far this year amid investor worries over a €360bn pile of non-performing loans — equivalent to about a fifth of GDP. Lenders’ profitability has been hit by a crippling three-year recession.
The plan being worked on, which could be officially announced as soon as Monday evening, recalls the Sareb bad bank created in 2012 by the Spanish government to deal with financial crisis in its smaller cajas banks, say people involved.
Although the details remain under discussion, it foresees the establishment of a private vehicle that will include upwards of €5bn in equity contributions — mostly from Italy’s banks, insurers and asset managers — and then a larger debt component. The fund will then mop up shares in distressed lenders.
A second vehicle will seek to buy non-performing loans at market prices.
“It is a backstop fund,” said one person involved in the talks.
The Italian government can provide only limited financial backing because of EU state aid rules and because it is already struggling under a public debt load that amounts to 132.5 per cent of GDP.
People involved in the talks question whether the plan would have the financial scope to provide a buffer of last resort for Monte dei Paschi di Siena. Italy’s third-largest bank was the worst performer in the 2014 European stress tests, with about €170bn in assets and about €50bn in bad loans. It is considered by many bankers to be the major risk to Italian financial stability and regarded as too big to fail.
“Monte Paschi is the elephant in the room,” says one of Italy’s top bankers.
Monte Paschi is already trading at zero compared with its tangible equity value if its bad debt disposal is taken into account at current prices, says Johan De Mulder of Bernstein Research. By comparison, when Lehman Brothers collapsed in 2008 it was trading at about 20 per cent of its tangible equity.
Berenberg analyst Eion Mullany argued that the “Italian banking sector is at a pivotal moment in its history”.
“We worry that a bail-in of an Italian bank may cause a chain reaction with ripple effects felt across the European banking system,” Mr Mullany added, referring to the possibility of bondholders and depositors in Italian banks being forced to participate in a rescue.
Key Buzzword and Phrases
- Last resort
- €360bn pile of non-performing loans
- Sareb bad bank
- Equity contributions, mostly from Italy’s banks, insurers and asset managers
- Backstop fund
- Public debt load that amounts to 132.5 per cent of GDP
- Buffer of last resort
- €170bn in assets and about €50bn in bad loans
- Too big to fail
- Elephant in the room
- Trading at zero compared with its tangible equity
- Lehman Brothers
- Pivotal moment in its history
- Bail-in of an Italian bank may cause a chain reaction with ripple effects
Those were the key buzzwords in order. Using those buzzwords in the same order, let’s condense the article down to the essence with as few sentences as possible.
Mish’s Concise Summation
As a last resort to ringfence a massive €360bn pile of non-performing loans of Italian banks, Finance minister Pier Carlo Padoan has called for a meeting of minds in Rome on Monday. Padoan seeks a plan reminiscent of the Sareb bad bank structure in Spain, even though that plan blew up several times.
The bad bank will require equity contributions, mostly from Italy’s banks, insurers and asset managers to build up a backstop fund. This approach is necessary because Italy has public debt load that amounts to 132.5 per cent of GDP in gross violation of Eurozone rules.
The structure needs a buffer of last resort because Monte dei Paschi di Siena, Italy’s third-largest bank, has €170bn in assets and about €50bn in bad loans. Monte dei Paschi di Siena is regarded as too big to fail, a veritable elephant in the room, trading at zero compared with tangible equity. Lehman Brothers collapsed in 2008 it was trading at about 20 per cent of its tangible equity.
This is a pivotal moment in history because a bail-in of an Italian bank may cause a chain reaction with ripple effects that will be felt across the European banking system.
I used 4 paragraphs, the Financial Times used 20. I threw in bonus buzz phrases “meeting of minds” and “blew up several times”.
Italy is desperate to avoid the path Austria announced today, a 54% Haircut Of Senior Creditors In First “Bail In” Under New European Rules as commented on by Zerohedge.
- 100% bail-in for all subordinated liabilities
- 53.98% bail-in, resulting in a 46.02% quota, for all eligible preferential liabilities
- Cancellation of all interest payments from 01.03.2015, when HETA was placed into resolution pursuant to BaSAG
- Harmonization of the maturities of all eligible liabilities to 31.12.2023
In contrast, Italy is the “too big to fail”, “elephant in the room”. Should Italy try Austria’s solution, it presumably would cause a “chain reaction with ripple effects that would be felt across the European banking system.”
Instead, officials will attempt to “ringfence” the problem, hoping to “sweep it under the rug” where presumably a “€360bn pile of non-performing loans” will cure itself, eliminating the need for additional bail-ins.
Mike “Mish” Shedlock