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
To me this certainly seems like a game of Jenga that game where you keep removing blocks from a tower until it collapses. At the sign of the first EU bail in, you would think a heck of a bank run would ensue.
Stuki Moi said:
For this to make “any” sense, even in the short term; Monte dei Paschi would have to be some sort of severe outlier in an otherwise very healthy financial sector. Even then, the more prudent institutions forced to pitch in for a “rescue”, would quickly realize the best way to play head I win, tails, everyone else loses, is to emulate Monte. But at least the can kicking wouldn’t cause immediately observable harm.
In reality, the only difference between Monte dei Paschi and the rest, is that the former is above some arbitrary threshold, and the others are just below. Meaning, if this was a correct and complete representation, you’d simply spread the bankruptcy around the whole sector.
So, one way or the other, what is being done, is diffuse the “problem loans” down to a size where they can be pawned off on the public, or more likely the public’s children, in individual doses small enough to supposedly keep them out of headlines. IOW, just another round of theft by well connected idiots. From, literally, infants. Who will be told that “we” “have” to pay “our obligations”…..
One really cool upside, should Isis take over Europe, is I really doubt they will care all that much about former Italy’s credit rating, and about honoring it’s supposedly national debt, incurred by a bunch of geriatric banksters long since beheaded.
In Spain’s case the government stood behind the financial rearrangement by issuing guarantees for just about everything ( as well as providing a restructuring fund that represents only a fraction of the liabilities undertaken ).
The reasoning, and it is still encountering argument at EU level, apart from hiding public liability… from the public, is to avoid the funding of the bailouts appearing as public deficit.
In reality this has seen various losses openly appear and accumulate for the public over time , very poor asset management and invented targets, and with the eventual main losses pushed a decade or more into the future.
People don’t care as they don’t understand and the problem seems to dissapear, in fact those that do complain are more upset about having property being withheld from the market and prices not dropping to within their reach, or due to sensing there is some form of corrupt arrangement between government and the bankers they associate with ( but without looking at the public liability side).
If the Neo-cohens get their Russia versus EU war.
It will not end well.
You only have 15 buzz words, you need 9 more to make a Bu11sh!t Bingo card. The meeting is only a few hours away and the participants cannot start the meeting without their Bu11sh!t Bingo cards. No official meeting is complete without them.
I missed a golden opportunity!
Perhaps I can add a few of my own
James Hayward said:
“Finance minister Pier Carlo Padoan has called for a meeting of minds in Rome on Monday… The bad bank will require equity contributions, mostly from Italy’s banks, insurers and asset managers to build up a backstop fund”
This sounds like the meeting where Paulson ORDERED the heads of the nations largest banks to a weekend meeting at the NY Fed and ordered them to find a solution to Lehman. That went well… uuhhmmm..
Yes it does. I thought of that too and should have mentioned it.
But, isn’t that what politicians do? Take credit for the good and pass the bad onto the next watch? Sweeping things under the rug aside, it’s amazing they never seem to be running out of “next watches.”
first national bank of matress said:
“it’s different this time”
Italy is ring fenced by reputation. 90% of Italian government debt is owned by Italian banks.
Actually it is the ECB that ring-fences , and they are doing more of that now by openly purchasing sovereign debt . Italian banks own a ‘relatively’ small percentage, which adds up to maybe 70% including domestic non-bank :
You quote 2013 pre panic data. My memory does not go back that far. I recall 90% of Italian government debt is owned by Italy. 2012 is when Draghi promised he would do what it takes and Europe shortly thereafter suffered a calamity of banker suicides. I guarantee you the Italian banks bought Italian government debt after the Draghi threat.
Adam Price said:
What difference does it make?
Adam Price said:
Simply time to make some more spaghetti!
Used to work with Eoin, smart guy but lacks flair for the big picture, or maybe just not been around long enough to see the bigger trends. I think with low commodity prices, a point Jeremy Grantham makes, and forward looking indicators good in the Eurozone that the Italian banks will be able to continue to sweep their problems under the carpet allowing them more time to slowly realise their losses.
Old Guy said:
Thanks for posting this Mish.
I too read about he bail-in of the Austrian bank. I am sure as with Cyprus the smart money left a long time ago. So the pleebs and small business that must bank local to pay its venders and investors got raped.
I do not know how Italy will get ring fenced when the Austrians just took in on the chin. What boggles my mind and I do not understand is why governments do not let these banks fail, write down the debt, and close the bank. We bail out banks and they know they will get bailed out so they continue to do business as usual. We prefer to screw over the depositors and the people to keep a bank from going belly up. I understand contagion but at some point in time these institutions need to fail. The longer they bail these banks out the larger the problem will become. Those that allowed this to happen need to be properly investigated and put in jail if it is warranted. As long as governments force bad bank practices and put their losses on the backs of hard working people nothing will change.
I may be looking at this wrong and maybe the reason they bail them out is because these banks are basically buying government bonds to finance their lack of control of government spending, which is the root of the problem. Maybe to continue to increase Italy’s GDP the banks are being forced to make bad loans, but come on, making bad loans to the public usually means they have the physical asset to back up the loan.
Have we gone so far down the rabbit hole forcing banks to issue bad debt just to increase the GDP?
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