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Will Italy’s Banking Crisis Spawn a New Frankenbank?

March 1, 2018

Will Italy’s Banking Crisis Spawn a New Frankenbank?

“Operation Overlord.”

There are rumors currently doing the rounds that Italy’s banking problems have finally been put to rest. The FTSE Italia All-Share Banks Index has soared about 40% over the last 12 months, about double the advance by the Euro Stoxx Banks Index. Six of the top seven gainers in the latter index this year are Italian.

The story of Italy’s non-performing loans, which just a year ago terrified global investors and posed a systemic threat to the entire Eurozone economy, “is over,” according to Fabrizio Pagani, the chief of staff at Italy’s Ministry of Economy and Finance. Pagani believes that now that the banking sector is well and truly on the mend, work should begin to take consolidation of the sector to a new level.

“There are too many banks,” Pagani told Bloomberg. “And in this sense, Monte dei Paschi could play a role. I think this could start this year.”

There’s clearly lots of room for consolidation in Italy, home to roughly 500 banks, many of which are small local or regional savings banks with tens or hundreds of millions of euros in assets. At the top end of the scale, Italy’s ten biggest banks control roughly 50% of the industry. The goal is to increase thatto 70-75% to bring it more in line with the levels of banking concentration in other EU countries. In Spain, for example, the five biggest banks — Santander, BBVA, CaixaBank, Bankia and Sabadell — control 72% of the market.

The problem is that, while last year’s bail out of Monte dei Paschi di Siena may have restored a certain amount of investor confidence to Italy’s banking sector, many of the largest banking groups are still extremely fragile, with stubbornly high non-performing loan (NPL) ratios. .

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Who Exactly Benefits from Italy’s Ballooning Bank Bailout?

January 2, 2017

Who Exactly Benefits from Italy’s Ballooning Bank Bailout?

Italy’s third largest bank, Monte dei Paschi di Siena, is not insolvent, according to the ECB; it just has “serious liquidity issues.” It’s a line that has already been heard a thousand times, in countless tongues, since some of the world’s largest banks became the world’s biggest public welfare recipients.

In order to address its “liquidity” issues, Monte dei Paschi (MPS) is about to receive a bailout. The Italian Treasury has said it may have to put up around €6.6 billion of taxpayer funds (current or future) to salvage the lender, including €2 billion to compensate around 40,000 retail bond holders.

The rest will come from the forced conversion of the bank’s subordinated bonds into shares. According to the ECB, the total amount needed could reach €8.8 billion, 75% more than the balance sheet shortfall originally estimated by MPS and its thwarted (but nonetheless handsomely rewarded) private-sector rescuers, JP Morgan Chase and Mediobanca.

All these events conform to a well established script. The moment the “competent” authorities (in this case, the ECB and the European Commission) agree that public funds will be needed to prop up an ostensibly private financial institution that is not too big to fail but nonetheless cannot be allowed to fail, the bailout costs inevitably soar.

And this is just the beginning. According to Italy’s Finance Minister Pier Carlo Padoan, the Italian government has already authorized a €20-billion fund to support Italy’s crumbling banking sector, with up to eight regional banks lining up for state handouts. In addition, MPS plans to issue €15 billion of new debt to “restore liquidity” and “boost investor confidence,” as several Italian newspapers reported on today. That debt will be guaranteed by the government and its hapless taxpayers.

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Bank Bailout Balloons, Tab for Italian Banking Crisis Soars

December 27, 2016

Bank Bailout Balloons, Tab for Italian Banking Crisis Soars

Monte dei Paschi di Siena sinks deeper into the mire.

Over the Christmas holidays, when no one was supposed to pay attention, and when the markets were closed, the bailout costs of Monte dei Paschi di Siena, the third largest bank in Italy, and the center of the Italian banking crisis, suddenly jumped by 75% to €8.8 billion ($9.2 billion)!

Just how immense the black hole inside of a bank really is remains unknown until the bank collapses entirely and the pieces are sorted out. No one wants to know, especially not bank regulators. But when banks are teetering, and a bank bailout, or rather a bondholder bailout is being discussed, the aspects of that hole begin to emerge, and the hole keeps getting bigger the longer someone looks at it.

Earlier this year, the ECB’s stress tests of 51 large European banks determined that Monte dei Paschi was the shakiest among them. The ECB gave the bank until the end of 2016 to raise enough capital or contemplate the prospect of being wound down.

Last week, after Monte dei Paschi failed to work out a private-sector rescue deal led by JP Morgan, a taxpayer bailout was moved to the front burner. The bank’s shares and bonds were suspended from trading until the details of the bailout would emerge. This came after two prior capital increases from the private sector in recent years had failed to fill the holes. Each time, gullible investors had gotten crushed.

On Friday, the Italian government decided to shanghai its taxpayers into bailing out the bank’s bondholders with only a small haircut for holders of certain junior bonds. The decree it approved to that effect was based on the assumption that a €5-billion bailout – a “precautionary recapitalization” – would be needed.

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Investor Fears Spike as Italy (and the EU) Inch Closer to Doomsday Scenario

July 5, 2016

Investor Fears Spike as Italy (and the EU) Inch Closer to Doomsday Scenario

Risk of contagion in Italy and far beyond would be huge.

Just how low can Italian bank shares go? That’s the question plaguing the minds of European investors, policy makers, bankers and central bankers. Today the shares of the country’s third largest publicly traded bank, Monte Dei Paschi, plunged 14% to €0.33, their lowest point ever. Two years ago, they ran between €5 and €9.

The reason for the latest plunge was news that the ECB had sent the bank a letter urging it to draw up a plan for tackling its bad-loan burden. The lender is being asked to reduce its load of curdled debt by €10 billion to €14.6 billion by 2018. That’s a big ask even in the best of times, and these are certainly not the best of times for Monte Dei Paschi. According toBloomberg, its loan loss provisions would represent over 95% of its operating profits.

No bank in Europe has fallen so low, so fast, without completely crashing and burning. On the eve of the global financial crisis, Monte Dei Paschi was worth €15 billion. Now its market cap is just over €1 billion. The only reason it’s still alive today are the multiple taxpayer-funded bailouts it has received, and all they seem to have achieved is to postpone the inevitable (and prolong the taxpayers’ suffering).

Earlier this year, Italy’s government was given the go-ahead to set up a bad bank in which to bury some of Italy’s most toxic financial waste. It was a €5 billion solution to a €360 billion problem, as we warned at the time – far too little, far too late. Last week the EU, in a fit of desperation, authorized the country to use “government guarantees” to create a “precautionary liquidity support program for their banks.”

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The Collapse Of Italy’s Banks Threatens To Plunge The European Financial System Into Chaos

March 8, 2016

The Collapse Of Italy’s Banks Threatens To Plunge The European Financial System Into Chaos

Italy Flag Map - Public DomainThe Italian banking system is a “leaning tower” that truly could completely collapse at literally any moment.  And as Italy’s banks begin to go down like dominoes, it is going to set off financial panic all over Europe unlike anything we have ever seen before.  I wrote about the troubles in Italy back in January, but since that time the crisis has escalated.  At this point, Italian banking stocks have declined a whopping 28 percent since the beginning of 2016, and when you look at some of the biggest Italian banks the numbers become even more frightening.  On Monday, shares of Monte dei Paschi were down 4.7 percent, and they have now plummeted 56 percent since the start of the year.  Shares of Carige were down 8 percent, and they have now plunged a total of 58 percent since the start of the year.  This is what a financial crisis looks like, and just like we are seeing in South America, the problems in Italy appear to be significantly accelerating.

So what makes Italy so important?

Well, we all saw how difficult it was for the rest of Europe to come up with a plan to rescue Greece.  But Greece is relatively small – they only have the 44th largest economy in the world.

The Italian economy is far larger.  Italy has the 8th largest economy in the world, and their government debt to GDP ratio is currently sitting at about 132 percent.

There is no way that Europe has the resources or the ability to handle a full meltdown of the Italian financial system.  Unfortunately, that is precisely what is happening.  Italian banks are absolutely drowning in non-performing loans, and as Jeffrey Moore has noted, this potentially represents “the greatest threat to the world’s already burdened financial system”…

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