Quiet crisis: why battle to prop up Italy's banks is vital to EU stability

A_Medium_Size_Jock

michaels wrote: »

But what are they invested in? If it is shares or bonds then why shouldn't they take the loss? If it is deposits then aren't they protected?

Not according to the link below:

We're fine with investors losing, yes even bondholders. But our aim and purpose here is to make sure that the banking system survives. And the Italian banking system as a whole is not doing well--a very polite way of putting it. Paschi is not the only bank which needs recapitalising. Unicredit is launching its own €13 billion plan (which it may succeed with) but there are others waiting in the wings who also need to do something. And of course bailing in bondholders at Paschi just makes it more difficult to use bonds as a method of recapitalising elsewhere. Further, the European rules insist that if there aren't enough bondholders then even depositors can and even must be bailed in. All of which, as the risk of that happening rises, plays merry heck with the funding of those Italian banks.

http://www.forbes.com/sites/timworstall/2016/12/22/monte-dei-paschi-to-be-nationalised-now-the-real-fun-in-the-italian-banking-system-starts/#2d02f55125e4

EU deposit Guarantee Scheme:
http://ec.europa.eu/finance/bank/guarantee/index_en.htm

Basically, covered up to 100,000 Euros.
Beyond that ..............

worldtraveller

Italy approves bailout for Monte dei Paschi

antrobus

michaels wrote: »

But what are they invested in? If it is shares or bonds then why shouldn't they take the loss? If it is deposits then aren't they protected?

Because "40,000 retail investors hold bonds in Monte dei Paschi". Making them 'take the loss' is regarded as "a politically explosive issue".

http://www.reuters.com/article/us-eurozone-banks-italy-monte-dei-paschi-idUSKBN14B15R

It seems they will be compensated according to the BBC.

In Italy those who stand to lose money as a result include tens of thousands of ordinary savers. The government says they will be compensated. Analysts warn that a failure to do so could provoke political unrest, potentially undermining the government, and playing into the hands of anti-establishment parties. It could also weaken other banks if savers rushed to withdraw their cash.

http://www.bbc.co.uk/news/business-38412557

The_Last_Username

Time will tell.

The Italian government counters that EU rules do provide for some compensation to small savers, and Padoan has said the administration will use them to the maximum. The key criterion for compensation, however, is that investors were “mis-sold” the bonds. In other words, before they get some money back, investors will have to argue that the securities were clearly too risky for their risk profile — something that might be difficult to prove.
As most Italians prepare for the traditional Christmas marathon of eating, drinking, and family time, many households face an anxious wait to see how much money they have lost on the country’s worst bank.

http://www.politico.eu/article/an-italian-banks-christmas-miracle/

worldtraveller

Let's be quite straight here. This is just the latest phase of the eurozone’s seemingly never-ending crises.

Italy faces a slow crawl back to, possible, economic health. Productivity growth remains weak, debt is still climbing and the economy can’t prosper while its banking sector is in such a poor position.

Current projections indicate that the Italian economy will not get back to its pre-crisis size until 2025 and, quite frankly, who knows what may happen over those intervening years!

IMHO, this is all just, yet another, brushing under the carpet, of a never-ending issue.

The_Last_Username

Ah yes, that debt.
Which currently stands at 142.98% of GDP according to the link below.
Or at over 130% according to the Reuters link.
Whichever, this is second highest in the EU, behind only Greece.

An added 20 billion Euros (for MdeiP) will push that up by more than 1%; however it is very widely accepted that a total of more than 50 billion Euros will be needed before long to stabilise Italian banks.
Which equals in total almost another 3% of GDP no matter which figure you believe.
Which will almost certainly lead to problems for a country already struggling with high unemplyment and a stagnant economy.

http://www.nationaldebtclocks.org/debtclock/italy

http://uk.reuters.com/article/us-eurozone-banks-italy-monte-dei-paschi-idUKKBN14C05J

worldtraveller

The Italian government is thought to have propped up struggling Italian lender Monte dei Paschi di Siena with a cash injection of some €6.5 billion.

The European Central Bank told the Italian lender on Monday that its capital shortfall had risen to €8.8 billion, much higher than the the €5 billion gap estimated by the bank.

The Telegraph

So, the ECB reckons the bank needs almost double the amount it had sought to raise only a few weeks ago! I just wonder what the final figure will be, and frankly, will be amazed if it's not even more, as it nearly always is with the eurozone crises.

antrobus

worldtraveller wrote: »

...So, the ECB reckons the bank needs almost double the amount it had sought to raise only a few weeks ago! I just wonder what the final figure will be, and frankly, will be amazed if it's not even more, as it nearly always is with the eurozone crises.

It really depends on how much carp there is in the loan book.

This report here says that;

The bank had a bizarre sense of how to do business, from the point of view of a non-Italian. It saw its mission as supporting the community, rather than making a profit, and it loaned money to hundreds of small companies that had no business taking on debt. Many of those loans will never be repaid.

http://uk.businessinsider.com/statistics-non-performing-loans-npls-italy-banking-system-2016-11

The report further explains, that part of the MDP restructuring plan was to hive off €28.5 billion in non-performing loans off its books and into some "securitization vehicle," at 33% of their gross book value. And raise €5 billion in extra capital.

Presumably the hive-off is now off the cards, and thus MDP will need more capital to support this €28.5 billion. €8 billion sounds like a start, €10 might be better.

A_Medium_Size_Jock

Is this the beginning of "But you can't do that"?

"The European Central Bank and European Commission must check and make sure that Italian authorities stick to the European rules," a ministry spokesman told Reuters when asked about Monte dei Paschi.

http://uk.reuters.com/article/uk-eurozone-banks-italy-germany-idUKKBN14H12Z?il=0

MacMickster

I suspect that when it comes to the EU continually taking money from their pockets to support the failing Euro, even the German public may stop being Good Europeans.

Warnings about other countries observing the rules are far too little, far too late.