Bondholder bail-ins are on the way in Italy as private investors pulled the plug on a bank rescue.
Rome plans a €20 billion bank bailout, but under eurozone rules junior bondholders have to take a hit.
Please consider Italy braces for Monte dei Paschi Rescue.
On Monday night, Italy’s finance minister Pier Carlo Padoan confirmed Italy is readying a €20bn rescue fund for MPS and other weak lenders as the chances of a successful €5bn private recapitalisation of the Siena-based bank recede.
By the evening of Thursday at the latest, it should be clear whether MPS, which was founded in 1472, will have been rescued by the private sector via a €4.5bn debt-for-equity swap and funds from anchor investors including the Qatar Investment Authority. As of Monday only €200m had been committed to the swap, suggesting the chances of pulling off the rescue are slim, said people close to the deal.
MPS’s debt-for-equity swap will close at 2pm Italian time on Wednesday. If it goes badly MPS could already ask the government to step in, said one Italian official.
According to an Italian official only about €2bn of the €20bn will be used for liquidity guarantees, and the rest for recapitalisations and for compensating some retail bondholders. Other banks will be rescued on a case-by-case basis over the coming months now that Italy has its “bazooka”. The €20bn rescue fund will abide by EU rules on so-called burden-sharing, which force losses on junior bondholders.
Italy’s banks currently have one of the highest problem loan ratios in Europe at 16.4 per cent of total loans, more than three times the European average of 5.4 per cent, according to Moody’s Investors Services and data from the European Banking Authority.
Nicolas Véron, an economist and senior fellow at Brussels think-tank Bruegel, argues that “assuming reasonable competent handling, the entire Italian bank system may reach an adequate level capitalisation to allow it to start working out its bad loans by the summer of 2017”.
Adding to confidence, UniCredit, Italy’s only globally significant bank, is expected be able to raise €13bn in new capital on the private market next year, say investors.
Bankers say reforming a fragmented system, of more than 500 banks, with weak profitability requires deep cuts of between 50,000 and 150,000 jobs by some estimates.
Bail-ins Coming, Expect More
Italian officials and bankers argue a capital injection of €20 billion will be sufficient to stem concerns about Italy’s banks by allowing adequate provisions for bad loans weighing on its economic recovery.
Mish Take
I scoff at the notion €20 billion will come close to curing the problem. Italy’s banks have a combined €360 billion of nonperforming loans that they admit to.
It takes quite a stretch of the imagination to presume €20 billion “bazooka” will plug a €360 billion hole. To do so would require an unbelievable recovery rate on those nonperforming loans.
€20 billion will not be enough. Heck, €120 billion is probably not enough. And on top of it all, between 50,000 and 150,000 job cuts are coming.
Has anyone asked “How those 50,000 to 150,000 will pay their bills?”
Side Note
This is seriously off-track. I recently launched a photography website and I would appreciate it if you would check it out. Here are links to my first three posts.
- Iceland in 16 Days: Day 1, South Region, Seljalandsfoss Waterfall
- Iceland in 16 Days: Day1-2 South Region, Skógafoss Waterfall, Reyniskirkja Church, Vik ChurchDecember 20, 2016
- Iceland in 16 Days: Day 3-4, South Region, Jökulsárlón Ice Beach
Lots more coming. Please take a look.
Mike “Mish” Shedlock
In Australia ‘bail-ins’ are not permitted. The banks cannot touch savings deposits, by law.
So why is it less secure in Europe etc? Or is it a scare campaign?
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This is a bail-in of junior bondholders
It could extend to depositors – but not yet
Recall that Cyprus bailed in depositors
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Only those over 100.000 euros lost money in Cyprus. Depositors with up to 100.000 euros were not touched because of state and EU guarantee.
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‘Laws’ are nothing more than an up ur down vote. They can change like the tides to satisfy any political whim. I respectfully submit your banks should not be trusted.
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Laws are obeyed until it’s inconvenient for the ruling class
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That is quite true of course. Like the currency the laws are also created from thin air, and governments can legislate other laws. Laws have no visible existence – they are ideas – and dollars have no physical existence, being just numbers in accounts marking the presence of debt.
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Savings deposits are used to finance and hence in bankruptcy are not there to bail-in the bank, or available to redeem even ? Maybe last in line to take loss unless guaranteed by central bank or government?
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“In Australia ‘bail-ins’ are not permitted” LOL! I live in Australia. The private sector has about the highest indebtedness in the world. Over 50% of that debt is borrowed short-term by banks in foreign currency and lent almost exclusively as long term mortgage debt to households in a property super-bubble. This is foreign currency debt that our government cannot print! We’re one debt hick-up from a “Let’s change the rules over the weekend and have a bail-in like they do with all dead-beat nations!”
Our future will look like Ireland, Italy, Greece, Malta etc. We sell nothing but commodities and that depends on China’s debt not imploding in a world that is fast turning to autarky (self sufficiency).
You comment “So why is it less secure in Europe etc? Or is it a scare campaign?” When debts implode then “Tooth fairy” economics ends… and the international creditors play hardball. Bail-ins are part of that hard-ball!
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Australia’s huge indebtedness is in mortgages, chasing asset inflation, as willed by the banksters. The funny thing is [I am in the construction industry] is that to do renovation work the costs are such that the high values are essential. Carpenters are asking over $A 3,000 a week and getting it – in Sydney anyway. So to renovate an inner city terrace ,say 3.6 metres wide is over $500,000 – not a high end renovation either.
To tell you the truth I don’t know why banks borrow in foreign currencies. That’s really a dangerous idea. Banks don’t use deposits to make loans. They just have to be solvent. A bail-in is just not necessary. They may be investing overseas so would use foreign currencies.
Yes, we do depend on commodities, also not a wise idea. People forget that exports are a cost to the economy and its natural capital. Imports are benefits. Australia can pay for its imports with “numbers in accounts” We get goods and services and give back numbers in accounts, something any MS nation can do. All China’s $1.3 Trillion is not in China. It is numbers in accounts in the US fed. China cannot pretend to get gold etc from the fed. It has to find buyers for its holdings. All Australia’s debt is denominated in our dollars.
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“To tell you the truth I don’t know why banks borrow in foreign currencies.”
I know why Australian banks borrow in foreign currencies – because Australia has no capital savings. That’s why our all our mines are developed by foreign partners, it’s why our “BHP” is really “BHP… Billiton” because it there was no savings within Australia to develop resources and had to go begging to London. It’s why our gas reserves are developed with foreign money – and now the profits will be sent overseas. Australia is a nation of debt serfs; when the music stops (and it always does) those carpenters taking $3K / week in Sydney will be in the dole queue…. standing alongside those who once thought outrageous house prices were good for the economy.
“Banks don’t use deposits to make loans. They just have to be solvent. A bail-in is just not necessary.” Oh yes it is necessary when the loans are in foreign currency and the debts / assets are in local currency; all it takes is the foreign creditors to sense danger and the jig is up.
“They may be investing overseas so would use foreign currencies.” No they’re not – just check out their quarterly statements. It’s 50% foreign debt lent to hold up the local mortgage super-bubble. Australia is another Cyprus or Ireland waiting to happen. The economic output of the whole country has been captured by the banks… and then levered to the hilt.
In a nutshell Australia has had a mining boom and has levered up it’s wealth to borrow abroad to “invest” in a Ponzi housing scheme whereby everyone bids up each others houses. All based on credit that beats all historical precedents. The automation revolution will kill this if other events don’t to it first. You say you’re in the building industry – well so am I… in automation. Swathes of Aussie jobs will go down the sink hole in the next ten years… and for each job lost there will be an average of $420K debt defaulted upon. This time is always different…. until the foreign credit tap gets turned off… watch out for the coming Bail-ins!
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I agree 100% with your final paragraph. The rest, not so much. There will definitely be a correction and the carpenters will be in the queue. However the correction is likely to be an “end of civilization” event. One reason we bid up assets is because what else is there to do in a mature economy that’s done all its growing years ago? Same as with corporate buy backs, to give the impression of growth as well as to cream off fees etc. The banksters have done their job so well they are killing the host, as Michael Hudson explains in his book of that name.
There was never any fundamental reason for us to borrow overseas. It’s just ignorance writ large by dolts who have no understanding of money, but plenty of ideas, scams, in finance. The housing bubble is not held up by overseas debt. It’s held up by our mortgages, using money the banks create from thin air. So it has to be something else. We should have N loans in foreign currency. We can fun fund all our infrastructure needs from within the government. It is actually a choice a political one, nothing to do with need.
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Monte dei Paschi shareholders now value the equity at 6% of book. So the market tells you that 94% is lost. It´s brutal when the price is set by the market. No manipulation there.
Only mystery is why depositors take the hint and withdraw.
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Junkers has said EU will help, aka, someone elses money will be used sometime, somehow.
The final outcome will be a crisis Schauble wants to force integration and harmonization on tax, spend etc.
Forget votes, means nothing to the people in charge.
Nothing will change unless the chang leads to further integration.
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Given that this is a pretty transparent situation, why is it that account holders are not running away in droves? I understand bondholders are trapped, but do people with their life savings inside of these banks really believe they are safe from bail-ins? With the preponderance of negative rates AND obvious risk of failure, why would they NOT be in cash….unless there IS no cash…no real assets? Just doesn’t make sense.
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They had @ 60bn deposit/current in q3, but emptying
http://seekingalpha.com/article/4031164-monte-paschi-run-bank-begun
Why anyone has any money deposited there now beats me though.
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Because majority of savers are under 100k euros. And they are safe whatever happens with the bank. I have yet to see European bank that failed (and quite few did in various countries) where depositors up to 100k lost money. It did not happen.
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“It did not happen.”
Yet.
Depositors over 100,000 had never taken a loss either. Until they did..
Banks need these kinds of bailouts because they are burning money. Sooner or later, they’ll be out of 100K+ depositors’ money to burn. Then out of bondholders money to burn…..
And then… they’ll still abide by the rules, but just require that all depositors show their patriotism by keeping 30% of their savings in the form of bonds or something.
If the leeches can get to the savings, the leeches will eventually get to the savings. Buried gold and strongly anonymized crypto currencies really are the only solution. No matter how loudly the rulers and their sycophantic indoctrinati insists that pointing this out, means one is crazy, antisocial and whatnot.
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“Italy’s banks have a combined €360 billion of nonperforming loans that they admit to.”
Isn’t this similar in the case of India too, and that is the reason for their depositor trapping and corraling?
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Mish I have been a follower of yours for some time. Probably 75% of the times I agree with you. However, when it comes to your pics of Iceland I “hate” you. I just wish that I could see these scenes and know when to shoot the pic. Damned fine work with the pics and also with your Blog Merry Christmas and a very prosperous 2017
Bob Langabeer Picton, Ontario
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O/T Noticed Pakistan has aired note withdrawal.
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as you all know, this is the tip of the iceberg as is the debt in every other euro country like … hmmm, Netherlands, Ireland, Sweden, Norway and Finland…I am sure I missed a few. These are the countries bathing in the goodness of the EU, its the south paying for their largesse not the other way around….why don’t you guys come to europe for man than a vacation and get educated!
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“oops” I made a typo, guess that is the Perry in me, or is it in my a$$.
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Nicolas Véron, an economist and senior fellow at Brussels think-tank Bruegel, argues that “assuming reasonable competent handling, the entire Italian bank system may reach an adequate level capitalisation to allow it to start working out its bad loans by the summer of 2017”.
…
Oh, I get it … everything, er, …”contained”…
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Isn’t every bank failure a universal bail-in?
We’re just getting back to reality by a very convoluted rout.
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A very convoluted “rout” indeed.
As Freudian slips go, that’s gotta be a classic.
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16.4% problem loans sound manageable until you realize private debt is 176% of GDP in Italy.
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Years ago , it was called throwing good money after bad. This is not a money problem, it’s way deeper than that. It has everything to do about evil because honesty left the senario a long time ago.
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Apples and Oranges. The article says the 20 billion is targeted at MPS and the 360 billion is the entire Italian banking system. Without knowing MPS’s volume on NPLs, we can’t really make a guess at the value of the 20 billion in this situation.
We also don’t know the residual value of the assets secured by those loans, or what portion of the loans were created by borrowed money, deposits or capital.
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There have also been recent reports of mass protests against criminal migrants in Italy. Since the EU censors such news, God knows what is really happening.
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We will return back to telling stories around the family fireplace if this trend of manufactured news by mainstream media continues. A good thing, in my view. There will be some inaccuracies and minor distortions as the story is passed on, but I will take that risk. /s
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There are some really good movies on DVD or netflix — many were made before hollywood started relying on sequels and prequels.
Failing that, your local library is filled with great books. No blue light keeping you awake all night, no monthly fees, no buffering, no waiting on hold for the cable company to reset your box. Just really good, well written, entertaining stories.
The fiction that is TV news isn’t very good, and its the same really bad writing staff as the last 8 years. Stay tuned for your next Kardashian big-butt update. Oh, and Miley Cyrus did something naked again. Obama gave all your money to illegal immigrants and the Clinton/DNC crime syndicate. Pay your taxes quickly so they can screw you again! Its almost time to find out what Paris Hilton said!!
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Twenty billion will be enough till the next summer. By then, MPS will be out of the headlines, a new rescue will be arranged, and the world will have plenty of bigger problems to deal with. I am saying this for some time already, but one day it will be true: the next year will be the year to live dangerously.
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Don’t believe anything out of ‘consultants’ out of the Brussells area.
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In Australia depositor bail-ins ARE permitted thanks to subtle changes in legislation. The bank simply shuts down and access to your account is denied indefinitely. However the government guarantees depositors after the fact. Which means you get your money back (up to 250k) when the government eventually gets round to processing claims, perhaps years later. In Europe deposits up to 100k are guaranteed in the same way. Bond holders and investment vehicle holders (the little guys) however may get squat. Ultimately the bail in laws are just a way to make a bank bailout look less like a handout to big corporation. The taxpayer and middle class saver still pays.
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Here is a great idea for a college style drinking game you can play on New Years Eve.
Every time an EU leader says “the crisis in ______ is resolved once and for all”, you drink. If the country named is part of your ancestry, two drinks.
If Draghi says he will take care of things, or mentions bazookas — everyone does a shot.
If Juncker appears like he has had more drinks than you, give your significant other a big sloppy wet kiss.
If you expect anything in the EU to actually get fixed for more than a week, you are a lump of coal; stay home and don’t ruin the holidays for everyone else.
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Pingback: European Banking Bloodbath Spreads To Spain After Italy Fires €20 Billion “Bazooka” At €360 Billion Problem |
Nice photos, but more girls in bikinis, and the Italian banks, Bunga Bunga
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