Tag Archives: Italian banks

The Impossible Italian Job, by Don Quijones

Posted on August 20, 2016 | Leave a comment

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

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The Looming Financial Crisis Nobody Is Talking About, But Should Be, by Shaun Bradley

Posted on August 2, 2016 | Leave a comment

SLL WILL BE ON VACATION AUGUST 3 & 4, AND WILL NOT BE POSTING. POSTING WILL RESUME AUGUST 5.

The European banking system implosion has begun. From Shaun Bradley at theantimedia.org:

The world has been captivated by a continuous stream of disturbing and shocking headlines. Seemingly every other day, different terrorist attacks, police assassinations or political stunts ignite the public into an emotional frenzy. But as fear shuts down critical thinking, banks that control Europe’s financial system are entering a death spiral. Despite what establishment media narratives push, the most dangerous threat to our way of life isn’t a religious ideology or political divide.

The real risk is a contagion that is undermining the core of the financial system, and the interconnectedness of the globalized economy we live in makes containing the problem nearly impossible. Concerns that used to be isolated to the failing state of Greece have now engulfed the rest of the PIIGS nations. If these dominos continue to fall in Europe, the momentum could carry the destruction to every corner of the globe.

Italian banks are the latest on the chopping block in the wake of Brexit. For years, they have been acknowledged as a weak link in the economic chain, but they now face stress tests that could expose the scope of their internal problems. The oldest bank in the world, Monte Dei Paschi, is at the center of the controversy, with an expected shortfall of over 3 billion euros.

Other big names, like UniCredit, are in equally bad shape. Wells Fargo recently found that nearly 15% of all loans held by Italian banks could be at risk of default, a staggering figure to attempt to unwind. Further, England’s departure from the E.U. has sparked questions over the future of the euro — and Italy could be the catalyst for an all out breakdown of confidence. If panic begins to grip the Italian people, things could escalate quickly, potentially triggering bank runs.

Mihir Kapadia of Sun Global Investments explained the current situation in a recent article:

“A perfect storm of slow or zero Italian economic growth, low interest rates and politically connected, often corrupt, lending have combined to create a situation where the Italian financial system is in need of a large rescue.“

The head of the European Central Bank, Mario Draghi, wasted no time reassuring the markets and downplaying the significance of the hurdles ahead. Draghi is a former governor to the Bank of Italy, and he recently came out in full support of a ‘public backstop’ for the toxic loans. The public backstop suggested is the political term for shafting the taxpayer. Governments and banks alike have no problem shifting the responsibility of the debt onto the citizens, all while chastising them about how excessive their entitlement programs are and framing the greed of everyday people as the root of the issue. For the elites, it is much easier to use austerity measures, inflation, and shaming of the public to deflect blame from themselves than it is to take ownership for their own corrupt actions.

New regulations passed by the E.U. prevent bailout-style action similar to what the U.S. implemented during the 2008 crisis, meaning the only other option on the table is to use customer accounts to re-capitalize, otherwise known as a bail-ins. We saw a test run of this a few years ago in Cyprus, which led to the confiscation of all personal funds exceeding 100,000 euros. In this trial, the seizures only affected the very wealthy, so there was little major outrage; most accounts over the threshold were also held by foreigners, particularly from Russia.

To continue reading: The Looming Financial Crisis Nobody Is Talking About, But Should Be

 

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Contagion from Italy’s Bank Meltdown Spreads, by Don Quijones

Posted on July 27, 2016 | Leave a comment

Italy’s banks may be the straw that breaks markets’ backs. Or the Europeans may do what they do best: kick the can and save face. From Don Quijones at wolfstreet.com:

There’s a pervasive sense of inevitability to Italy’s banking crisis.

Without a taxpayer-funded bailout that directly contravenes the Eurozone’s new bail-in rules, the world’s oldest surviving bank, Monte Dei Paschi, could soon be out of business. Shares of the decrepit financial entity have long been reduced to a penny stock. So far this year, they’ve lost 78% to close on Tuesday at an inconsequential €0.28.

The closer it comes to its end, the louder the calls for its rescue. Last week saw two out of three of the members of the institutional triad formerly known as the Troika — the ECB and the IMF — lend their support to a taxpayer funded bailout of Italy’s banking system. So, too, did the biggest U.S. bank by assets, JP Morgan Chase.

All that was needed was for Europe’s most influential bank, New York-based Goldman Sachs, to give its blessing. That came on Monday in a report whose conclusion is fittingly Goldman-esque: saving Italy’s banks is not just necessary; it would be a bargain for all concerned. The authors breezily point out that the €210 billion euros of non-performing loans (ha, the ECB says €360 billion and growing every time someone looks at it) on the books of the banks could all be wiped out with the equivalent of just nine months of ECB President (and former Goldmanite) Mario Draghi’s bond purchases.

Here’s the FT:

With the ECB hoovering up €120bn per year of outstanding Italian government bonds as part of its quantitative easing scheme, “by the time QE is over – not sooner than end 2017, on our baseline scenario – around a fifth of Italy’s public debt will be sitting on the Bank of Italy’s balance sheet”, writes Francesco Garzarelli at Goldman…

Bringing the entire net stock of bad loans onto the government’s balance sheet would be equivalent to 9-months worth of BTP [Italian government bond] purchases by the ECB…

With four days for authorities to come up with a plan to inject capital into Monte dei Paschi, Goldman adds that some form of “state intervention is both “likely and, at this late stage, desirable”.

Desirable for whom?

According to Goldman, Italy as a united whole – from the poorest to the richest, the oldest to the youngest – all will benefit from wiping the bank’s — or banks’ — slate clean. An added bonus, the report contends, is that Italy’s troubles are largely contained to its domestic economy. “Italians have lent mostly to themselves: the country’s net international investment position is comparatively small,” the report says.

This is a disingenuous falsehood that has been peddled across multiple media for weeks now. The contagion risk of Italian banks and their bonds is significant, particularly for banks in France and Germany, but also in Spain, the UK, and the US.

However “cheap” the eventual bailout may be — and one can be sure it will be considerably more expensive than the original estimates — it will do little to remedy Italy’s chronic financial ills, which include a stagnant economy, a public debt that exceeds 130% of GDP, a currency that is too strong, a zombified housing market, 35% youth unemployment, and entrenched political corruption. As The Guardian‘s Larry Elliot writes, Italy’s non-performing loans reflect a “non-performing economy.” They are “the symptom of the problem, not its cause.”

To continue reading: Contagion from Italy’s Bank Meltdown Spreads

 

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Look Who’s Frantically Demanding that Taxpayers Stop Italy’s Bank Meltdown, by Don Quijones

Posted on July 22, 2016 | Leave a comment

Notwithstanding recently revised EU rules which forbid it, you can bet that Italy’s banks will be bailed out. From Don Quijones at wolfstreet.com:

New Opportunities for “America’s Most Corrupt Bank.”

It was a perfect gift to a desperate market. All that was needed was a gentle hint that Italy’s troubled banks and their bondholders might not be hung out to dry. A “public backstop” for Italy’s weakest lenders would be a “very useful” measure in these “exceptional times,” ECB President Mario Draghi said.

Most Italian and European bank stocks surged.

The ECB is the second member of the institutional triad formerly known as the Troika to have called for a taxpayer funded bailout of Italy’s banking system. Earlier this month the IMF used its article IV consultation – an annual economic and financial health check – to warn of “global spillovers” from a full-blown Italian banking crisis, “given Italy’s systemic weight.”

Desperate times call for “significant measures,” says IMF economist Juan Toro. These measures include a taxpayer-funded state intervention, a practice that was supposed to have been consigned to the annals of history by Europe’s enactment of new bail-in rules on Jan 1, 2016. The idea behind the new legislation was simple: never again would taxpayers be left exclusively paying to bail out bondholders of Europe’s insolvent banks.

But even before the ink has dried, the new rules are about to be broken, or at least bent beyond recognition. Apparently this is necessary for two main reasons:

a) To save the small investors. Under the EU’s new bail-in laws, Italy’s government can only create a bank rescue package by making bondholders pay for a bailout by converting a portion of their bonds into equity. But roughly one-third of senior bank debt and half of subordinated bank debt, worth a combined total of €235 billion, has been sold, with the government’s overt blessing, to small Italian retail investors and savers, in lieu of CDs. If the bail-in rules are followed to the letter, hundreds of thousands of little people will be taken to the cleaners.

b) To avert a political bloodbath. If hundreds of thousands of Italian retail investors are sacrificed in this type of bondholder bail-in, Italian Prime Minister Matteo Renzi’s chances of winning the do-or-die referendum on changes to Italy’s constitution in October will be further impaired. A public backlash over a bail-in could lead voters to turn to the 5 Star Movement, which has called for a referendum on Eurozone membership. The mere prospect of such an outcome would be enough to trigger a surge in bond yields, credit-rating downgrades, further economic slowing, and added troubles for banks. Oh, and it could be the final nail in the Eurozone’s coffin.

Conspicuously absent from the bleeding-hearts narrative is the even greater risk of contagion to other financial institutions, not just in Europe but all around the world. Almost all the talk is about protecting small-time investors, but what about the big fish?

To continue reading: Look Who’s Frantically Demanding that Taxpayers Stop Italy’s Bank Meltdown

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As Fears of “Bank Run” Escalate, Italian Banks Get €150 Billion Bailout of Empty Promises, by Don Quijones

Posted on July 1, 2016 | Leave a comment

European banks, probably starting with Italy’s, are going to fail, you can tell just be the subterfuges the Europeans are using to make it look like they won’t fail. From Don Quijones at wolfstreet.com:

In today’s Europe, the most important rules are made to be bent, if not outright broken. So it goes with Italy’s blossoming banking crisis.

Earlier this week, Italy’s €40-billion bailout proposal was mercilessly scrapped by Germany, on the grounds that it contravened Europe’s new bail-in rules. Cue Plan B, as reports surfaced today that the EU had authorized the country to use “government guarantees” to create a “precautionary liquidity support program for their banks.“ The total amount currently doing the rounds is €150 billion.

That’s a lot of money, even by today’s inflated standards. In the initial bailout of Spain’s saving banks, in 2012, the EU provided Rajoy’s government with just €40 billion of fresh cash. If the latest reports are true, Italy just received almost four times that amount.

But did it, really? Does the money even exist?

After all, government guarantees are not the same as cash in hand. According to Reuters, the ECB’s latest move, which has received scant attention in the press, is more of a political stunt than a prudential one:

[The funds] won’t actually be used, and don’t solve banks’ main problem – capital holes. Instead, the aid has a secondary purpose: to show Prime Minister Matteo Renzi can do deals in Brussels…

Italy is using the panic from the UK vote to ask the European Commission to let it bail out its banks and skip state-aid rules. Getting the green light would provide an even bigger boost to Renzi’s chances in the referendum, yet the Commission may not approve such a flagrant bailout. As such, getting the go-ahead even on unused guarantees is a start.

The word “unused” is a curious choice of term, especially given that the same article stresses that the funds won’t “actually” be used, for the same reason that they would constitute illegal state aid and contravene the EU’s new bail-in rules. In other words, they will be unusable, which is surely a roundabout way of saying “useless.”

The Commission has also stipulated that only “solvent” banks are eligible for the “precautionary” scheme, as if Italy, where banking stocks have fallen by a mind-blowing 54% in just the last six months into penny-stock territory, is just brimming with banks that are perfectly solvent but would nonetheless appreciate the kind offer of new funds they can’t use.

The scheme is clearly a desperate ruse, but if it can temporarily convince enough voters, investors, and bank depositors that things are not quite so bad in Italy anymore, that the banks finally have something of substance — and not just unusable, inaccessible funds — backstopping their €360 billion worth of non-performing loans, it will have served its purpose.
Perhaps things might even improve enough to enable Italy’s Prime Minister Matteo Renzi to buck recent trends in Europe and actually win a national referendum, scheduled for October, which would allow him to ram though changes to the country’s constitution. If he doesn’t, it could, as Reuters warns, become a vote against him, or yet another against the European Union, and sink the government:

Banks’ collateral might then collapse if markets start to fear the radical Five Star Movement is about to win power and take Italy out of the euro zone. Fears of a bank run could escalate if Italian banks start to fail European Central Bank stress tests.

To continue reading: As Fears of “Bank Run” Escalate, Italian Banks Get €150 Billion Bailout of Empty Promises

 

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Italy’s Banking Crisis Spirals Elegantly out of Control, by Wolf Richter

Posted on February 14, 2016 | 1 comment

The ECB is accepting as collateral for loans impaired debt that is so junky that the only institution dumb enough to guarantee it is…the ECB! This convoluted story is hard to believe, but apparently it’s happening. From Wolf Richter at wolfstreet.com:

How to dump toxic waste on the public through the backdoor.

Back during the euro debt crisis, while the ECB was buying government debt from Member States to keep Italian and Spanish government debt from imploding, German politicians fretted out loud about what exactly the ECB was buying. Among them was Frank Schäffler, at the time Member of the Federal Parliament, who in September 2011 said with uncanny accuracy:

“If the ECB continues like this, it will soon buy old bicycles and pay for them with new paper money.”

This is now coming to pass.

Italy, the Eurozone’s third largest economy, is in a full-blown banking crisis. Four small banks were rescued late last year. The big ones are teetering. Their stocks have crashed. They’re saddled with non-performing loans (defined as in default or approaching default). We’re not sure that the full extent of these NPLs is even known.

The number officially tossed around is €201 billion. But even the ECB seems to doubt that number. Its new bank regulator, the Single Supervisory Mechanism, is now seeking additional information about NPLs to get a handle on them.

Other numbers tossed around are over €300 billion, or 18% of total loans outstanding.

The IMF shed an even harsher light on this fiasco. It reported last year that over 80% of the NPLs are corporate loans. Of them, 30% were non-performing, with large regional differences, ranging from 17% in some of the northern regions to over 50% in some of the southern regions. The report:

High corporate NPLs reflect both weak profitability in a severe recession as well the heavy indebtedness of many Italian firms, especially SMEs, which are among the highest in the Euro Area. This picture is consistent with corporate survey data which shows nearly 30% of corporate debt is owed by firms whose earnings (before interest and taxes) are insufficient to cover their interest payments.

The reason these NPLs piled up over the years is because banks have been slow to, or have refused to, write them off or sell them to third parties at market rates. Recognizing the losses would have eaten up the banks’ scarce capital. Reality would have been too ugly to behold.
The study found that the average time for writing off bad loans has jumped to over six years by 2014. And this:

In 2013, on average less than 10% of bad debt, despite already being in a state of insolvency, was written off or sold. The bad debt write-off rate varies significantly across the major banks, with banks with the highest NPL ratios featuring the lowest write-off rates. The slow pace of write-offs is an important factor in the rapid buildup of NPLs.

Now, to keep the banks from toppling, the ECB has an ingenious plan: it’s going to buy these toxic assets or accept them as collateral in return for cash.

To continue reading: Italy’s Banking Crisis Spirals Elegantly out of Control

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