On Friday the ECB Shut Down Venice-based Veneto Banca and Banca Popolare di Vicenza as failed or failing banks.
The bailout cost is purportedly €5.2 billion ($5.8 billion), but costs nearly always exceed initial projections.
Under the announcement, senior bondholders and depositors will be protected.
The European Central Bank said Banco Popular was “failing or likely to fail” due to its dwindling cash reserves. The good assets of Banca Popolare di Vicenza and Veneto Banca will be taken on by Intesa Sanpaolo. Economy Minister Pier Carlo Padoan said Rome would also offer guarantees of up to 12bn euros for potential losses from bad and risky loans.
Let’s discard the “likely to fail” category. Those banks are insolvent and have been walking zombies for years. The entire Italian banking system is in a zombified state.
I believe those loan guarantees are illegal under ECB rules but the ECB may simply look away. The price tag now is another €12 billion.
Rush to Keep the Banks Open
Bloomberg reports Italy Rushes to Approve Decree Law to Keep Two Veneto Banks Open.
Italy is rushing to approve emergency rules outlining liquidation procedures for two failed banks in the northern Veneto region in time for them to open on Monday.
The government is set on Sunday to approve a decree law setting up rules that would let Intesa Sanpaolo SpA buy some assets of Banca Popolare di Vicenza SpA and Veneto Banca SpA at a token price and determine the state intervention needed to avoid losses for senior bondholders.
The Finance Ministry has said all measures would be taken to ensure that senior creditors and depositors are protected in their liquidation under the national insolvency law, and customers would see no interruption in service. The Bank of Italy is expected to appoint administrators to liquidate the bad assets, while Intesa may formalize its purchase of good assets by Monday, according to local press reports. State intervention may cost as much as 7 billion euros ($7.8 billion), Corriere della Sera reported.
The government tried for months to rescue the two banks, but its efforts ended on Friday when the ECB turned the matter over to the Single Resolution Board in Brussels for disposal. The SRB, in turn, passed the issue to Italian authorities after concluding there was no public interest in resolving them under European Union law, a process that would have exposed senior debt holders to losses.
Brave New World of Bail-Ins on Display
Junior bondholders are going to be wiped out. That is for sure.
But why should senior bondholders be protected?
Reuters discussed the Brave New World of Bank Bail-Ins on January 14, 2016.
The European Union entered a brave new world of bank “bail-ins” at the start of 2016. Europe has wasted so much taxpayers’ money on bailing out bust banks in recent years that it is right to try to get investors to help foot the bills in future. However, the tough new regime carries big political risks.
The key new rule is that no bank can be bailed out with public money until creditors accounting for at least 8 percent of the lender’s liabilities have stumped up. So-called bail-ins typically mean wiping out creditors’ investments, slashing their value or converting them into shares in the bank. Uninsured depositors could get caught along with professional investors.
Moreover, within the euro zone, national authorities will no longer be responsible for dealing with bust banks as this job has just been transferred to the new Single Resolution Mechanism.
The theory is that shareholders should take the first hit because they know they are risking their money. If that isn’t enough to stabilize the bank, subordinated bondholders should step up because they too should know such investments are risky. Next in line are senior bondholders and, finally, uninsured depositors – which, in the EU, means those with more than 100,000 euros in their accounts. The small depositors should not be touched.
Unfortunately, bail-ins are harder in practice than in theory. A big test came during the Cypriot crisis of early 2013. The euro zone’s initial instinct was to tax all depositors, big and small, to fill the gap in bank balance sheets. Although that bad idea was abandoned, large depositors suffered swingeing losses, helping cause a steep recession.
Other countries do not want to repeat the Cypriot experiment. No wonder Italy and Portugal rushed to rescue some of their troubled banks before the tough new regime kicked in at the start of January.
Not that Rome and Lisbon had a free hand over what to do. Since mid-2013, the commission has said public money could only be used to bail out lenders if shareholders and subordinated bondholders shared the burden. Still, this was not as tough as the new 8 percent rule, which could require senior bondholders and uninsured depositors to take a hit too.
That said, applying even the old rules has caused a political rumpus. Italy used a new industry-funded bailout scheme to pump 3.6 billion euros into four small banks in November. The problem was that many of the subordinated bondholders who had to be bailed in were ordinary savers who had been sold these investments without appreciating their risk. One committed suicide.
Who are the Senior Bondholders?
The bail-in rules appear to be bent to the tune of €12 billion in public money guarantees.
Who are the senior bondholders protected under this sweetheart deal?
I don’t know, but I have two guesses.
- Italian political class
- ECB
If the ECB is protecting its own portfolio of garbage Italian debt, this is exactly the kind of rule-bending, no details, no discussion activity that we could expect, and now see.
Mike “Mish” Shedlock
What fool would put up their money to be a jr. bond holder…
Or to own their stock?
Actually, it looks like retail Italian investors who bought junior bonds will get their money (€200m). All of the other junior bond holders will get the shaft (€1.2b). The lesson: only Italians should buy Italian junior bonds.
So the taxpayers reimburse themselves? The bonds still defaulted, but the retail folks pay EUR1000 in taxes and get EUR 1000 in bonds made whole…
There is no free lunch, the retail folks got taken also
Reblogged this on World4Justice : NOW! Lobby Forum..
Senior bondholders were NOT “bailed-in”. They get away UNSCATHED.
Italian TAXPAYERS get stuck with the resulting “bad bank” and AT LEAST 10 BILLION Euro in losses.
EU bail-in “rules” were ignored. What a surprise.
Business as usual and back to square one.
These bail-ins are replacing lost money due to malinvestment. Virtual money creation -> dilution of savings, asset inflation & wage stagnation. As a consequence, everyone becomes a bit more conservative -> save more(buy less) = money velocity slowdown -> recession -> credit contraction -> more bank problems.
The balancing act performed by policy makers is an faux solution, when seen through the eyes of economic activity. Few will like how this ends…
When does this end?
There is never a shortage of sheep to shear.
It’s time for a good old-fashioned bank(s) run…
It’s always a good time for a bank run.
As soon as this is not true, you know someone is being robbed to paper over what is perfectly normal creative destruction.
Just as you knew something was not on the up-and-up, as soon as you heard that in the Soviet Union, no company ever went bankrupt…..
Yes, it’s amazing the lengths policy makers will go, to make things worse.
“It’s for the common good”
Since 2008 we have seen the formula, the theme to be followed. Since that debacle the game is Too Big To Fail. People are seeking roles of large enough stature, of political and financial importance such that they can hold society at large hostage. We are seeing in corporations of all types, corporations seeking vertical integration and market dominance such that they are untouchable. Bankers the same but more, and politicians with their sweaty hands on the levers of power, ensuring these “premium’s” survival.
When confidence in the rules disappears all hell is let loose & one day the market will wake up – properly – to how the Eurozone really does work.
Stay well away from the banks, insurance companies and finance in general especially as a foreigner.
They handled Cyprus the way they did because of he # of Russian investors. Foreigners are fodder. Different rules apply when its the ruling class that stand to lose. All are equal but some more equal than others.
Off topic but worth having in mind.
What is probably not very apparent to Americans is the amount of European Nationalism there is. That’s not France v Germany but a deep Europe Super-State vs US, vs Russia, vs China, vs India type of Nationalism.
It’s not in the people, it’s in Brussels and the expansion obsessed upper echelons. The old conflicts (France v Germany) are gone but will become European Super-State vs Others. Future conflicts will be on a much larger geographic scale. The mind-set hasn’t changed, just the size of the chess board.
Just the intent to have a European military bigger than the US tells you something.
Given the European obsession with expansion its only a matter of time before it results in conflict on the edges. Might be Russia.
Europe doesn’t fund its own militaries now, and doesn’t meet its NATO obligations.
They have expressed “intention” to build militaries in proportion to their international aspirations for decades — but intentions haven’t turned into reality.
Now they have no money, welfare operations are overwhelming state budgets, their tax base is a shambles…. and NOW they are going to build the military they couldn’t when they had money?
That isn’t EU super-state-ism… that is just losers daydreaming while other people actually do things. The world is full of people who “intend” to win the lottery. Who cares?
One way or another they are determined to get there.
Whatever they do or don’t achieve it will cause conflict.
Not going to happen in this lifetime.
Western Europe is already just a Gazprom annuity, maybe a little extra cashflow on the side for Norway.
France can’t even protect Paris from terrorism, much less Marseilles. Germany’s police have been over-run by illegal immigrants, and Germany’s own chancellor is working against Germany. Italy can’t even keep a government in place long enough to clean up the boom boom room.
Its laughable that they think they can build a credible fighting force to project power overseas when they can’t even protect their own countries.
Russia is going to drain wealth out of the EU via Gazprom — there is zero point to invading. Without a real boogey man to frighten Europe into cohesion, the whole thing falls apart.
Yeah but… Germany armed itself heavily in six years to ’39 in spite of Weimar economic chaos. Different era, but for EU to suddenly overtly arm on a large scale is not beyond possibility. An example, the US pre-announces NATO withdrawall so EU has “all the excuses” to fill “the gap”.
If you think Merkel is half as competent as Hitler, then go right ahead and build your paper army. Not saying Hitler was a nice guy nor ethical nor someone to look up to — he was crazy in lots of ways. But he could get stuff done, whereas Merkel / Hollande and pretty boy (the new French stooge who’s name doesn’t matter) are just going to talk everyone to death.
Merkel is as useless as Neville Chamberlain — appeasing illegal immigrants who raid Germany to lie, steal, rape and pillage — while Merkel gets driven around in an armored car and police escorts.
Various characters in European history were dangerous. The EU is more like inspector Clouseau but without the humor
Yes but…. you don’t think they are a front, that there is similar to a deep state at work?
There is lots of paper written, a lot of it wet, but the only impediment to the ever expanding acquis becoming real, is the lack of common force.
When its place is prepared, we would be foolish not to also expect it, much as I tend to hold contempt/distaste to it all also.
The Italians need to look southeast to an island called Greece…
Reuters reports “”Those who criticize us should say what a better alternative would have been. I can’t see it,” Economy Minister Pier Carlo Padoan told a press conference…”
Well Pier Carlo, how about applying the ECB rules – or better recognizing you are all siting on a time-bomb and making plans now to exit the Euro before very much worse than the consequences of two failed little banks is visited upon you?
Very good point. The rules are there for a reason: follow them. They are designed with long term in mind.
Europe is filled with guys who can’t see the work of Steve Keen or Stephanie Kelton or Wynn Godley or Michael Hudson. None are so blind as those who can’t/won’t see. Break up of Europe is a best case scenario at this point. Europe stays intact only at the point of a gun from now on.
The establishment (in every ares of the world) ALWAYS protects itself. While the people have savings earning just about 0%, they can invest in the bonds of insolvent banks, get good returns and sleep well knowing that the taxpayers will bear any loss.
And the establishment wonders why the people are angry.
Just have to look how many people at the top of the EU are x-GS people.
Put a fork in it, the EU just collapsed.
I am not disputing whether some n’er-do-wells will continue hanging out in Brussels smoking stinky cigarettes and daydreaming about how they almost married a super model.
I am saying the EU isn’t even pretending to follow its own laws and directives. If the EU doesn’t care, and anchor states don’t care — there is zero reason why anyone else would care.
A decades old joke in the bond markets was “it ain’t over till big Italian banks start failing”…
Ladies and Gentleman, please take your seats. The final act has begun.
Senior bank bondholders are sacrosanct.
Never to take A PENNY in losses.
They (and we) will keep bailing them out and placing the losses on already-bankrupt governments until the whole thing collapses.
Moral hazard run amok.
A system with no future.
The political class in Italy got a bailout (this time). French political class got a bailout in Greece.
But in Spain, the political class wasn’t in the failed bank, so they got a bail *IN* (depositors got clipped). Greek depositors also do not hold political appointments in Brussels, so they got a bail *IN*.
The politically connected get bail outs. The little people get bail ins.
At least when the monarchies of old stole wealth, they were honest enough to say “I am King, sucks to be you!”. There wasn’t this ridiculous democratic rubbish the EU pulls.
The EU has already issued a press statement denying that this bail out of the political class exploits a loophole for themselves… which just confirms that is exactly what happened
Bam Man – “Senior bank bondholders are sacrosanct. Never to take A PENNY in losses.
They (and we) will keep bailing them out and placing the losses on already-bankrupt governments until the whole thing collapses.”
And only because ordinary citizens do not understand what’s happening. If they did, if they understood that their tax dollars were being used to bail out senior bondholders, they’d be screaming. They just don’t understand it.
These financial thieves purposely use words like “quantitative easing” or “market equilibrium” which the public don’t understand. What they should say instead is, “We’re robbing you – again – but don’t want you to know it.”
“Saracho, formerly one of three JPM global VPs, considered a lynx of global banking ‘ was reduced to phrases like ‘The f**** accounts of this f****** bank’, or ‘ I am going to ram this bank into the doors of the ECB’ after taking charge of ( Spanish) Banco Popular ( late last year I think). Among three main legal cases resulting from the bailin is one demanding the accounts used to calculate shareholder losses, from the JUR, which have not been made available, nor the name of the accountant, after going on three weeks from the date of the wind down.
In Spanish
http://www.elespanol.com/economia/empresas/20170625/226477705_0.html
Italian Banks have been failing since banking began. The term bankrupt comes from “banca rotta” (broken bench). Sweetheart deals to protect insiders’ money are also as old as the hills (unless you are Russian and you park your money in Cyprus).
Thanks Mish for drawing attention to this and the scams of the privileged under the surface.
I wonder when anger will overwhelm Bankers and the protection rackets – I guess when the SHTF and all those pet militarized forces don’t get paid.
Senior EU debt is risk free, tax free, and closely held?
Can anyone answer this question for me: If these senior bondholders did not get bailed out, what would that do to interest rates?
Senior bond holders are not manipulating interest rates — the ECB is.
In theory, bond holders know they are taking risks and have a diversified portfolio. So a default might be painful but won’t cause a meltdown (or impact interest rates much).
HOWEVER — because the central banks have manipulated interest rates to stupid levels, all bets are off. No one knows if the criminal politicians will do a bailout or not — and if they do, which bailout will cause the inevitable collapse in confidence in the whole Euro scam.
Sr Bond defaults don’t matter — the question is what event is going to damage the central bank’s credibility enough that it can’t manipulate interest rates further.
Keynesians — like Zimbabwe and Venezuela — will say they can always print more currency. But that has limits as Zimbabwe and Venezuela have shown.
Yeah yeah — Europe cannot default anymore than Bethlehem Steel or Penn Central RR or New York City or Detriot or any of a long list of things that were “too big to fail” until they failed
Medex Man – thank you very much for your reply.
MISH —
Did you see the story (Reuters Bloomie Nikkei and several other places) about how Japanese 10yr bonds did not have a single trade last week? I think it was Wednesday or Thursday (don’t remember which) — nothing traded the whole day. Zero zip nadda.
There was also a day last week when TIBOR futures did not trade. Like the whole TIBOR complex was dead — imagine if LIBOR and Eurodollar futures had zero trades for a whole day.
While keynesians make silly excuses and predict (each year) that this is going to be the year Japan’s markets recover… the fact remains the JGB market is dead, and the Japanese government has been forced to jam unwanted bonds down the throats of Postal savings accounts. If they didn’t force the sales, no one would buy the bonds of the third largest economy in the world!!
Zero trades in the sovereign bonds of the third largest economy in the world… that is not a functioning G7 system
I did see that
Curiously, I was just going to write about it
Coming up
Losing money is a hard sell.
When are we going to see the public lynching of the central bankers across the world? It is high time! If politicians also can be lynched alongside, all the better.. After all getting rid of two of the slimiest bunch the world has ever seen can not but be good for the whole world..
Is a complete and total lack of business acumen a requirement to be hired as a banker? Why do so many banks have such absurd business strategies/
“the best way to rob a bank is to own one”
“Is a complete and total lack of business acumen a requirement to be hired as a banker? Why do so many banks have such absurd business strategies”
It was a process, as anything is in a cycle. Interstate banking and mergers into bigger and bigger banks. The death of Glass Steagall, Greenspan taking the lending standards to ZERO to facilitate a record housing bubble. Financialization of mortgage debt, the SEC giving leverage waivers to the Big Five investment banks- it was a process over time, resulting in another 1930’s moment.
Once they clean this mess up, eventually they will undo the new regulations, so it can happen again, unless the robots intervene next time around.
The bankers’ creed: “when it gets serious, you have to lie.”