More can kicking fun and games from Italy, whose banking system has both feet in the grave and is only waiting for somebody to fill up the hole. From Don Quijones at wolfstreet.com:
The Art of Making Bad Debt Disappear.
Markets can move in mysterious ways. Such was the case in Italy last week when the stock of the country’s third biggest and most beleaguered bank, Monte dei Paschi, surged 59%, from €0.17 a share to a totally whopping €0.27 a share, pairing its losses for this year to just 78%. But why?
After all, nothing of real import happened over the last week, apart from an announcement from MPS’s board that it intends to forge ahead with its original plan to bolster capital and sell soured loans. None of which qualifies as new news. Moreover, the announcement did absolutely nothing to dispel the huge doubts that continue to loom over the plan’s chances of success.
The board is expected to announce its latest intentions in a meeting on Monday. Its plan appears to already enjoy the full support of Italy’s government. “I am confident of the business plan that the bank’s management has presented,” Economy Minister Pier Carlo Padoan told Repubblica, adding (tongue presumably lodged firmly in cheek): “Of course with full autonomy.”
Making Bad Debt Disappear
Hatched by advisors from JP Morgan Chase and Italian investment bank Mediobanca, the current plan essentially envisages removing bad loans with a gross value of €27.7 billion from the bank’s balance sheets. This would be done by securitizing the “assets” (i.e. chopping them up and lumping them together into nicer smelling “marketable” asset-backed securities) and then offloading these ABS onto a separate entity at their estimated net value of €9.2 billion.
That entity would be funded by €6 billion-worth of investment-grade notes — i.e. freshly conjured debt — which would be eligible for a state guarantee. In other words, if things go to hell, taxpayers will pick up most of the bill to bail out the bondholders.
The rest of the money will come from a mezzanine tranche of €1.6 billion, to be taken up by Atlante, a bad-bank fund backed by Italian financial institutions, many of them state-owned as we reported last week; and €1.6 billion of junior bonds, to go to Monte dei Paschi’s shareholders. That, in simple terms (ha!), is how JP Morgan Chase and its co-underwriters hope to make €18.5 billion worth of toxic debt vanish into the ether.
Serious Creative Accounting
The other part of the plan to save MPS is, if anything, even more ambitious than the first: to raise €5 billion in fresh capital from shareholders that already lost €8 billion in two previous capital expansions, in 2014 and 2015. Unsurprisingly, most investors are not keen on the idea. So, an alternative plan hatched by Corrado Passera, a former government minister and (in the words of of The Economist) “ex-banker,” is now under serious consideration by the board.
In all likelihood, it was this revelation that drove Monte dei Paschi’s shares to surge nearly 60% last week. Put simply, investors are clinging to the hope that an even more creative, less costly solution can be found to forestall Monte dei Paschi’s collapse, or a full-blooded taxpayer-funded bailout.
To continue reading: Italy’s Banking Crisis Gets Addressed: How to Conceal a Problem that Threatens to Engulf the Entire Eurozone