Tag Archives: Italian banks

ECB Tapering May Trigger “Disorderly Restructuring” of Italian Debt, Return to National Currency, by Don Quijones

An Italian banking system collapse still in one of the favorites for the catalyst that kicks of the next global debt crisis. From Don Quijones at wolfstreet.com:

The only other option: “Orderly restructuring.”

Here’s the staggering scale of the Italian government’s dependence on the ECB’s bond purchases, according to a new report by Astellon Capital: Since 2008, 88% of government debt net issuance has been acquired by the ECB and Italian Banks. At current government debt net issuance rates and announced QE levels, the ECB will have been responsible for financing 100% of Italy’s deficits from 2014 to 2019.

But now there’s a snag.

Last month, the size of the balance sheet of the ECB surpassed that of any other central bank: At €4.17 trillion, the ECB’s assets have soared to 38.8% of Eurozone GDP. The ECB has already reduced the rate of purchases to €60 billion a month. And it plans to further withdraw from the super-expansionary monetary policy. To do this, according to Der Spiegel, it wants to spread more optimistic messages about the economic situation and gradually reduce borrowing.

Frantically sowing the seeds of optimism on Wednesday was Bruegel’s Francesco Papadia, formerly director general for market operations at the ECB. “On the economic front, things are moving in the right direction,” he told Bloomberg. The ECB will begin sending clear messages in the Fall that it will soon begin tapering QE, Papadia forecast. By the halfway point of 2018 the ECB would have completed tapering and it would then use the second half of the year to move away from negative interest rates.

So far, most current ECB members have shown scant enthusiasm for withdrawing the punch bowl. The reason most frequently cited for not tapering more just yet is their lingering concern about the long-term sustainability of the Eurozone’s recent economic turnaround.

To continue reading: ECB Tapering May Trigger “Disorderly Restructuring” of Italian Debt, Return to National Currency



In Bleak Prognosis, Italy’s Financial Regulator Threatens EU with Return to a “National Currency”, by Don Quijones

The Italian financial system just keeps getting worse. It will blow up. From Don Quijones at wolfstreet.com:

Nerves are fraying in the corridors of power of the Eurozone’s third largest economy, Italy. It’s in the grip of a full-blown banking meltdown that has the potential to rip asunder the tenuous threads keeping the European project together.

In his annual speech to the financial market, Giuseppe Vegas, the president of stock-market regulator CONSOB — a consummate insider — delivered a bleak prognosis. The ECB’s quantitative easing program has “reduced the pressure on countries, such as ours, which more than others needed to recover ground on competitiveness, stability and convergence.”

But it hasn’t worked, he said. Despite trillions of euros worth of QE, Italy has continued to suffer a 30% loss in competitiveness compared to Germany during the last two decades. And now Italy must begin to prepare itself for the biggest nightmare of all: the gradual tightening of the ECB’s monetary policy.

“Inflation is gradually returning to the area of the 2% target, while in the United States a monetary tightening is taking place,” Vegas said. The German government is exerting mounting pressure on the ECB to begin tapering QE before elections in September.

So, too, is the Netherlands whose parliament today treated ECB President Mario Draghi to a rare grilling. The MPs ended the session by presenting Draghi with a departing gift of a solar-powered tulip, to remind him of the country’s infamous mid-17th century asset price bubble and financial crisis.

For the moment Draghi and his ECB cohorts refuse to yield, but with the ECB’s balance sheet just hitting 38.7% of Eurozone GDP, 15 percentage points higher than the Fed’s, they may ultimately have little choice in the matter. As Vegas points out, for Italy (and countries like it), that will mean having to face a whole new situation, “in which it will no longer be possible to count on the external support of monetary leverage.”

To continue reading: In Bleak Prognosis, Italy’s Financial Regulator Threatens EU with Return to a “National Currency”

Is Italy’s Banking Problem Becoming Too Big to Solve? by Don Quijones

Don Quijones pretty much answers his own question in the affirmative. From Quijones at wolfstreet.com:

They said it was contained, but now it hit the largest bank.

Ever since the European Commission and ECB jointly decided that Italy’s government could bend EU banking rules out of all recognition in order to bail out the country’s third largest bank, Monte dei Paschi di Siena, Europe’s financial stocks have been on a tear. But the good times were brought to a grinding halt Monday after Italy’s largest bank, Unicredit, which employs 55,000 people in 17 countries, announced losses for 2016 of €11.8 billion.

By the bank’s logic, it would have announced profits if it hadn’t had to write off €12.2 billion, including billions of euros of non-performing loans (NPLs) festering on its balance sheets.

But it got worse. In the registration document for its pending recapitalization, published on its website today, Unicredit also announced that its capital ratios at the end of 2016 might fall short of ECB requirements. It was enough to prompt a 5.45% slide in its shares. As detected in the ECB’s latest stress test, Unicredit already had the slimmest capital buffer of all Europe’s Global Systemically Important Banks (G-SIBs). And it just got slimmer.

The reality today is not comforting: a bank that is officially too big to fail, with over €1 trillion of “assets” on its books, just admitted that things are even worse than initially feared. Somehow, Unicredit will need to raise €13 billion in new capital by the end of June. If successful, it would be the biggest capital expansion of Italian stock market history.

Earlier this month, the bank has pushed through a 10:1 reverse stock split, cutting its shares outstanding by a factor of 10 and multiplying the share price by 10. So its shares today plunged 5.45% to €26.20 instead of to, say, €2.62. It makes the shares look more palatable, but it does absolutely nothing to bank’s market capitalization, which is down to just €16.2 billion.

To continue reading: Is Italy’s Banking Problem Becoming Too Big to Solve?


Who Exactly Benefits from Italy’s Ballooning Bank Bailout? by Don Quijones

Heads, large banks win; tails, taxpayers lose—the game is the same in Italy as it is everywhere else. From Don Quijones at wolfstreet.com:

All these events conform to a well established script.

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.

To continue reading: Who Exactly Benefits from Italy’s Ballooning Bank Bailout?

Italy’s Banking Crisis Gets Addressed: How to Conceal a Problem that Threatens to Engulf the Entire Eurozone, by Don Quijones

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


How Italy’s Banking Woes Could Crush Already Faltering Domestic Demand, by Caroline Gray

The black hole of Italian banks’ bad debt is threatening to suck in the Italian economy. From Caroline Gray, Senior Economics Editor, Focus Econonics, at wolfstreet.com:

The sudden panic about a potentially imminent Italian banking sector collapse back in July has somewhat subsided for now, but sooner or later the issue will inevitably rear its ugly head again.

Two months after Italian bank stocks collapsed even further in the aftermath of the Brexit vote, fears of an imminent need for a bail-in have receded as the Italian government works on plans to shore up its weakest bank, Monte dei Paschi di Siena (MPS). This will be achieved via an alternative but rather ambitious method culminating, if all goes according to plan, in a new capital injection.

However, MPS, which came up short in July’s ECB stress tests, has already received capital injections in the past. Such plans to patch up banks have tended to involve kicking the can down the road rather than providing a more definitive solution to the 360 EUR billion of non-performing loans (NPLs) weighing down Italy’s banking sector – equivalent to one fifth of its GDP.

If a sustainable solution is not found to clean up Italian bank balance sheets in the near future, they will inevitably constrain domestic demand and thereby weigh on the country’s already feeble growth even further.

Domestic demand, the longstanding mainstay of the Italian economy, is already under intense pressure. In the second quarter, GDP failed to grow in quarter-on-quarter terms, primarily on the back of a broad-based deterioration in all components of domestic demand (private consumption, government consumption and fixed investment). Domestic demand is expected to remain weak, based on our latest September Consensus Forecast for Italy.

A failure to swiftly clean up bank balance sheets means domestic demand will inevitably suffer as bank credit supply constraints continue to prevent the recovery of investment. Loan-loss provisioning reduces the credit banks have available for lending, especially to small and medium-sized enterprises (SMEs) and consumers, which are perceived as risky.

Analysts assessing the Italian banking sector are now most worried about the risk of chronically constrained growth rather than another systemic shock, as banks are trapped in a vicious circle whereby poor economic growth means bad loans keep growing, which in turn weigh on growth even further.

The latest ECB stress tests showed that most Italian banks do have loss-absorbing capacity to withstand a theoretical three-year economic shock, but strong concerns remain about their profitability as NPLs reduce their lending ability and deter investors.

Moreover, this scenario of sustained weakness prolongs the risk of banks eventually being forced to resort to a bail-in. A recapitalization of the banking sector involving substantial losses for retail investors would strongly hit consumer confidence and spending, the backbone of Italy‘s economy.

For a country whose already weak economic growth is heavily dependent on domestic demand, this would therefore bode disaster – and not only for the individual citizens with affected bond holdings.

To continue reading: How Italy’s Banking Woes Could Crush Already Faltering Domestic Demand

Italian Banking Crisis Turns into Mission Impossible, by Don Quijones

It is hard to see how a country whose economy has essentially not grown for two decades is going to solve severe bad debt problems without massive defaults and government bailouts. From Don Quijone at wolfstreet.com:

Even supposedly good debt on banks’ books may end up putrefying.

This week the world’s oldest surviving bank, Monte dei Paschi di Siena, tried to give itself a new lease of life by bringing in fresh blood at the top, following revelations that the Italian lender’s chief executive, Fabrizio Viola, and former chairman, Alessandro Profumo, are under investigation for alleged false accounting and market manipulation.

But the change of guard did nothing to improve market sentiment or performance. By Friday MPS shares had sunk to their lowest point ever — just 21 precarious cents above zero — and, once again, they had to be halted by Italy’s FTSE MIB.

MPS’s new boss Mario Morelli (formerly of Bank of America-Merryl Lynch, Unicredit and Intesa), faces an insurmountable challenge trying to steady the leaking ship. MPS must raise up to €5 billion as part of an emergency rescue plan to stave off the risk of being bailed in, and consequently wound down or chopped up into little pieces and gobbled up by its rivals.

Given that it would be the bank’s third cash call in as many years, investors are understandably reticent to pour yet more funds into the bottomless pit, Reuters reports:

(The bank’s) 45-billion-euro mountain of bad loans is deterring investors from backing it in its third recapitalization in as many years, according to four leading European fund managers and the investment banking source with knowledge of the matter.

Since the private sector-backed rescue blueprint was announced in late July, hundreds of investors had been sounded out about buying stock but interest has been lukewarm, said the source.

This could be bad news, given that for MPS’ latest rescue plan to have any chance of working, both parts of the plan — Part A and Part B — must succeed.

Part A consists of a €28 billion bad-loan sale for which JP Morgan Chase, Citi and Italian investment bank Mediobanca are already assembling a bridge loan, in return for very handsome fees. Atlante, Italy’s deeply opaque, Luxembourg-based bank rescue fund, has reportedly agreed to buy the so-called mezzanine tranche in Monte dei Paschi’s bad loan securitization.

Apparently demand for heavily discounted, slowly-decomposing bank debt in Italy is high, which is great news considering Italy is purportedly home to roughly a third of all of the bad debt at EU banks. In a perfect sign of our yield-starved times, last week saw around 250 global investors converge on Venice to attend Banca Ifi s SpA’s “Non-performing Loan” conference. That’s twice as many as last year, reports Bloomberg.

In other words, Part A of the rescue plan seems to be coming along nicely — as long as no one asks who will make up the difference between the book value of the bank’s toxic assets and the discount value at which they’re now being sold.

As for Part B of the Plan — MPS’ €5 billion cash call scheduled for the end of this year — it’s going nowhere fast. Twice-bitten, thrice-shy investors are no longer buying the hype. Gennaro Pucci, chief investment officer at London-based investor PVE Capital, said that even if a significant proportion of MPS’ bad loans were “spun off into a special vehicle,” he would not buy more MPS shares out of fear that the bank could suffer further losses from the remaining soured debt.

To continue reading: Italian Banking Crisis Turns into Mission Impossible