It goes without saying that there will be another can-kicking exercise in Europe to deal with the Italian banking crisis. The only doubt is what exactly they will do to pretend that Italian banks aren’t bankrupt. Probably what they always do: get the ECB to buy debt. From Don Quijones at wolfstreet.com:
The Italian Banking Crisis would complete Europe’s “Doom Loop.”
Italy’s repeated attempts to stave off a full-blown financial crisis and breathe life back into its moribund banking sector can be summed up in four words: too little, too late.
In April, it set up a bad bank vehicle called Atlante that was expected to bail out the country’s most troubled lenders as well as allay growing fears of a systemic crisis within the financial sector. With just €5 billion of funds to its name, it did neither.
Cue Plan B, which saw the EU in June grant permission for Italy to use “government guarantees” to create a “precautionary liquidity support program for their banks“ worth €150 billion. On the surface it seemed like a lot more money, but in the end it amounted to little more than a PR stunt. The stampede out of Italian banks barely missed a beat [As Fears of “Bank Run” Escalate, Italian Banks Get €150 Billion Bailout of Empty Promises].
Finally, at the end of July things got seriously serious with the unveiling of Plan C: a third, much larger rescue deal for Italy’s chronically dependent and third largest bank, Monte dei Paschi. The deal involves a consortium of banks, led by JP Morgan, and in a secondary role, Italian investment bank Mediobanca, which will apparently help Monte dei Paschi raise €5 billion in new capital and sell €9.2 billion in bad loans at a deep discount to get them off its books.
As we reported, the underwriting fees are going to be extraordinarily juicy, in particular for JP Morgan. For Monte dei Paschi, meanwhile, the impact could be somewhat more muted, especially given the immense difficulties it’s likely to face offloading close to €10 billion worth of putrefying debt that nobody wants to touch, as The Economist points out:
As the Distressed-debt investors tend to buy loans in bulk, and hence prefer loans with easily recoverable, tangible collateral. The NPLs of stricken British, Irish and Spanish banks in recent years were largely mortgages: being backed by property, they could be valued from current real-estate prices. British and Irish courts are also pretty efficient at dealing with claims on collateral. Many Italian NPLs, by contrast, are uncollateralised loans to small businesses or consumers. Even when collateral has been pledged, Italian courts are much slower than those elsewhere to recover it.
This may help explain why since the announcement of its latest “rescue” on August 5, MPS’ stock – reduced to a penny stock long ago – has plunged a further 8%, from €0.25 to €0.23.
If investors do not believe that even JP Morgan Chase, with the help of an all-star cast of global systemically important, precariously interconnected financial institutions, can sanitize a fraction of the bad debt putrefying on the balance sheets of the country’s third biggest bank, then Italy — and by extension, the Eurozone — may have even bigger problems than previously thought. After all, Italy accounts for roughly one third of the Eurozone’s estimated €1 trillion worth of non-performing loans.
To continue reading: The Impossible Italian Job
