Monte Paschi symbolises the economy of Italy

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by Shaun Richards

There is a saying that history does not repeat but it does rhyme. Well it faces a challenge from the world’s oldest bank where we keep facing the same situation. You might think that after all the bailouts  Monte Paschi Di Siena is done, but as ever another twist arrives.

LONDON/MILAN (Reuters) – Italy is working on a plan to take on about 14 billion euros ($17 billion) of UniCredit’s impaired loans to make a takeover of state-owned Monte dei Paschi more attractive for the country’s second-biggest bank, sources told Reuters.

This is all rather familiar as we look back as there never seems to be quite enough money to cover the problems. Reuters summarises the most recent bailout before this one.

Rome spent 5.4 billion euros in 2017 to rescue the loss-making Tuscan bank, which now needs up to another 2.5 billion euros, giving fresh urgency to efforts to cut Italy’s 64% stake as agreed with European Union authorities.

After warning its capital reserves would breach minimum thresholds in the first quarter, MPS must tell the ECB by the end of January how it plans to address the shortfall.

For the Italian taxpayer there is an element of robbing Peter to pay Paul about all of this.

Bad loan manager AMCO, which is backed by Rome and run by former UniCredit executive Marina Natale, is looking to hoover up around 60% of UniCredit’s problem debts while also ridding Monte dei Paschi of some high-risk loans, two sources said on condition of anonymity.

The plan is part of measures being readied by the Treasury in order to press ahead with the sale of MPS, whose plight has come to symbolise Italy’s long-running banking crisis.

Yes we have another bank bad loan manager in Italy which to be fair is a booming business. Regular readers will recall Atlante I and II which were sometimes called Atlas and to be fair the image of trying to hold up the whole world must have been how they felt. Things there just went from bad to worse. Or rather from declared triumph to bad to worse. So the banking private sector effort turned into a state backed one.

AMCO, a state-backed bad loan manager, has gone from bit player to one of the leading forces in Italy’s 330 billion euro ($390 billion) bad debt market in the space of three years with over 33 billion euros in assets under management.

Swamped by bad debts from the last financial crisis, Italy in 2016 put the Treasury in control of AMCO, expanding its remit beyond managing the problem loans of failing Banco di Napoli for which it had been created two decades earlier.

This is not the last of the problems here as back on December 2nd we looked at this from parmapress24.

WHO CAN ASK FOR DAMAGES  – Apart from those who were constituted in the process (and who will not have to – for now – do anything), all those who are or have been holders of shares in Banca Monte Paschi di Siena can make a claim  between 2008 and 2015 and those shareholders who resold the bank’s securities in the period in question , accusing a significant loss of assets.

I have to confess the first thought that brings to mind was the claim by the previous Prime Minister Matteo Renzi that Monte Paschi was a “good investment”. Anyway there is another issue for the Italian taxpayer from this.

To address the costly legal risks stemming from MPS’s ill-fated acquisition of rival Banca Antonveneta in 2007, the Treasury is working with its advisers on three options.

These would entail either a “guarantee scheme” or alternatively some kind of “insurance contract” with cash as collateral, one of the sources said.

Another option is a subordinated loan whose principal could be wiped off under certain circumstances, the source added.

Interesting as “certain circumstances” have so far happened 100% of the time where Monte Paschi is concerned. Reuters pins down an amount.

Sources have said the foundation and MPS could consider a settlement that would see 3.8 billion euros in damage claims dropped in exchange for shares in the bank.

I have seen 10 billion Euros quoted before and again the track record is that the higher amounts come into play and sometimes they are not high enough.

This will also drove a Jose Mourinho sized bus through the European Union banking and competition rules. But it is the same EU via the European Central Bank which is pressing Italy to sort this out.

Along the way Unicredit will get quote a few billion Euros of sweeteners. Also as more banks are merged into it then it will become exactly the Too Big To Fail or TBTF institution we are supposed to be trying to avoid.

Italy’s Economy

We can look at this as a case of this was then and that is now. The then was Italy’s statistical office on the 22nd of December.

In December 2020, the respondents became more optimistic again, so the consumer confidence bettered from 98.4 to 102.4……..As for the business confidence climate, compared to the previous month, the index (IESI, Istat Economic Sentiment Indicator) showed a new significantly improvement, rising from 83.3 to 87.7.

Whereas yesterday’s Markit PMI business survey told a very different story.

The Composite Output Index* posted 43.0 in December to
signal a third successive contraction in Italian private sector output. The index figure was little-changed from November’s 42.7 and signalled another marked decline overall, which was again driven by the services sector.
A further reduction in new orders at Italian companies
was also recorded in December. The rate of decline eased
noticeably on the month, but was still sharp.

There was a minor rally in construction reported this morning but frankly a reading of 50.5 means treading water.

As you can see below the further slow down is also affecting the labour market.

Amid ongoing weakness in demand, firms made further
cuts to their staffing levels during December, extending the
current sequence of falling employment to ten months. That
said, the rate of job shedding eased since November and was modest.

Comment

As Elton John would say this is a sad.sad situation ( the economy) and it’s getting more and more absurd ( the banks). If we start with the former then the official Italian forecast for the Euro area is below.

GDP in the euro area is expected to fall again in Q4 by -2.7% with a decline by -7.3% in 2020 compared to the previous year. Given the assumptions mentioned above, GDP should recover by +0.7% in Q1 and +3.0% in Q2.

As events have moved on we now face another contraction in Q1 as we see something I have consistently warned about. When forecasters do not know they automatically predict growth/ Sadly in line with our “Girlfriend in a coma” theme Italy looks set to under perform.

Switching to the banks they do not even get any particular asset based relief from house prices.

According to preliminary estimates, in the third quarter of 2020, the HPI (see Italian IPAB) decreased by 2.5% compared with the previous quarter and increased by 1.0% compared with the same quarter of the previous year (it was +3.3% in the second quarter)………The decrease on quarterly basis of HPI was only due to the prices of existing dwellings (-3.2%), while prices for new dwellings increased (+1.1%).

In many ways this is admirable as younger Italians do not face the house price surges seen elsewhere as prices are below those of a decade ago with an index now of 105.6 as opposed to the 118.1 of 2010. Although they would need a job.

From the point of view of the ECB though this is a complete disaster as we have official interest-rates at -0.5% and -1% for the banks as well as a QE driven five-tear yield of -0.1%. But house prices do not respond.

 

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