What happens when insolvent banks hold the bonds of insolvent governments? That’s a question that will soon confront Europe. From Don Quijones at wolfstreet.com:
What will Draghi do?
After two controversial bank rescue operations that stretched Europe’s bank resolution laws beyond recognition, things are beginning to look a little less desperate for Italy’s banking sector. The initial market reaction to the interventions has been overwhelmingly positive. For the first time in years Italian banks are leading Europe’s Stoxx 600 bank Index — upwards, not downwards.
One of the Italian banking sector’s biggest problems — its sky-high bad loan ratio — will soon be under control, claimed Bank of Italy Governor Ignazio Visco in a recent speech to the Italian banking association. The interventions in Monte dei Paschi di Siena and the two Veneto-based banks, Popolare di Vicenza and Veneto Banca, will take almost €50 billion of bad loans off their balance sheets, leaving about €275 billion in the system. Within a year Italy’s non-performing loan ratio will be down to an almost respectable 8% of total loans, Visco said.
To that end the government will create a new semi-publicly owned national asset management company (NAMC) that will help “develop the market for bad loans.” To lend the scheme legitimacy, European finance ministers rushed through approval of NAMCs for all Eurozone economies last week.
These NAMCs will vacuum up some of the nonperforming loans from bank balance sheets and sell them at a discount on the secondary market. According to Visco, the only way such a scheme would be “useful” is if it is applied on a purely voluntary basis and the assets are transferred at a price “not too far from their real economic value” — i.e. the value assigned to them by the banks. Untold billions of euros of taxpayer funds will be used to make up the difference between what market participants are willing to pay for the banks’ impaired assets and the price the banks want for them. This is the more covert part of Italy’s publicly funded bank rescue program.
To continue reading: Fears of “Doom Loop” between Italian Banks and Government Bonds Resurface