Italy’s New Government Eats Its Words, Joins Bank Bailout Club

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Well, that didn’t take long. And whatever happened to the Eurozone’s new bail-in rule?

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

Italy’s government, in its eighth month in power, has already bailed out a bankrupt bank, mid-sized Banca Carige, with public funds. If approved by European Commission and the ECB, it will be the fourth Italian bank rescue in just over two years. As Italian daily Il Sole 24 Ore points out, Italy’s populist government has adopted virtually the exact same playbook to save Carige that was used by its predecessor in the previous three resolutions:

The draft of the new Carige decree is a carbon copy of the one used by the Gentiloni Government for the bailouts of Monte dei Paschi di Siena (MPS), BPVI and Veneto Banca — identical in every detail from the rules on state guarantees to the mechanisms adopted…

It took just eight minutes for Italy’s coalition partners, Five Star and the League, to renege on their flagship promise never to bailout a bank, reports Bloomberg. The new decree will allow the government to guarantee Carige bonds up to a maximum value of €3 billion, making it easier for the lender to retain access to the funding market. The government also wants the option, if necessary, to recapitalize the bank by injecting as much as €1 billion into its coffers despite having lambasted the previous government for doing the exact same thing with MPS.

It’s not yet clear whether the proposed rescue of Carige will contravene EU state-aid rules, which are supposed to impose strict conditions on the “precautionary recapitalization” envisaged by the government. Carige is already under the administration of ECB-appointed administrators after failing to agree to a €400 million capital increase at the end of last year. So if there are any issues it should be easy for European Commission or the ECB to stop the bailout dead in its tracks.

In the case of the two Venetian banks, BPVI and Veneto Banca, the ECB’s Single Resolution Board decided the two lenders weren’t eligible for a bailout. Instead, the banks were forced into a last-minute takeover by Italy’s second largest lender Intesa. Nonetheless, €17 billion of public funds were used to bail out senior bondholders and depositors, including a €5 billion capital injection for Intesa which picked up the Venetian bank’s good assets and took on its liabilities, such as deposits.

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Junior bondholders did face losses in the operation but Italy’s current government has promised to return money to bank investors that lost their shirts in recent years. Its hotly disputed budget for 2019 includes a €1.6 billion fund to compensate retail junior bondholders and even shareholders up to, respectively, 95% and 30% of their initial investments.

Ratings agency S&P has already given the government’s bailout of Carige its seal of approval, arguing that it should help to stabilize Italy’s last remaining troubled mid-sized lender. A similar thing was said following Intesa’s rushed takeover of the Venetian banks. Considering Carige’s market share represents just 1% of Italy’s banking sector, the bailout is unlikely to have important implications for Italy’s banking sector, S&P said.

But it could besmirch Italy’s populist government, which in opposition had repeatedly blasted its political foes for using scarce public funds to help out bank bondholders. More important still, if a bank as small and as non-systemic as Carige can be bailed out with public funds, what does that mean for Brussels’ much-vaunted bail-in legislation, which was supposed to put an end to taxpayer-funded bailouts by allocating losses to shareholders and certain bondholders?

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Since becoming law on Jan 1 2016, the EU’s bail-in rule has only been used properly once, to resolve Spain’s Banco Popular in June 2017. It was a very different script. The ECB’s Single Resolution Board (SRB) deemed the lender was “failing or likely to fail.” Within no time, Popular’s shareholders, who’d been repeatedly suckered into handing Popular fresh funds in numerous capital expansions, were unceremoniously wiped out. Also taken to the cleaners were holders of Popular’s riskiest bonds, its AT1 bonds and AT2 bonds, or CoCo bonds.

The bank’s senior bondholders and depositors were spared while the bank’s assets, including a massive portfolio of small-business clients, were handed to Banco Santander, Spain’s biggest bank, which also took on the banks liabilities. Santander had to set aside €7.9 billion to plug Popular’s remaining balance sheet holes, most of which of which was raised in a fresh rights issue.

Popular’s demise marked the first time under the EU’s Bank Recovery and Resolution Directive that shareholders and subordinate bondholders of a European bank had not been bailed out by taxpayers, although Santander did receive tax credits in its shotgun takeover. The fact that financial markets had received the “bail-in” of Popluar’s investors calmly seemed to suggest that investor bail-ins were the route to go in future bank resolutions. As I averredat the time, perhaps the Eurozone’s banking authorities were finally growing some teeth. I was wrong.

And German authorities, rather than kicking up a fuss about the Italians bending EU bailout rules, are likely to look the other way. They have enough problems in their own banking sector to worry about, including troubled Deutsche Bank. By Don Quijones.


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