by
Don Quijones
In
this late winter of generalized discontent, it is not easy to
pinpoint just where the biggest threat to Europe’s increasingly
flimsy union lies, so intense is the competition. One obvious
contender is the Eurozone’s third largest economy, Italy, which
faces a banking crisis, an economic crisis, a debt crisis, and a
political crisis all at the same time.
The
country’s Five Star Movement is gaining momentum both in the polls
and in its efforts to call for a referendum on euro membership. In
the meantime, Italy’s newly installed government wants — indeed,
needs — to bail out a growing number of banks but has neither the
money nor the political capital to do so.
Things
had gotten so bad that the country’s two bad banks (Atlante I and
Atlante II), ostensibly created to stabilize the financial system,
were themselves on the verge of collapse. Turns out that things are
even worse than we had thought, following a blistering tirade on
Tuesday from Italy’s bad banker-in-chief, Alessandro Penati.
“There
is no clear vision of the problem and no strategy,” Penati told
a financial conference in Milan, according to Reuters. He said he was
virtually working alone on rescues that had revealed “horror
stories” within some banks.
In
short, the insider blame game has begun.
Penati,
whose boutique asset management firm, Quaestio Capital Management,
was chosen to oversee the supervision of Atlante in late 2015,
directed much of his ire at the banks themselves, in particular
Italy’s two largest financial institutions, UniCredit and Intesa
Sao Paolo. Atlante’s investors had, he said, shown “zero
long-sightedness,” after declining to invest more in the fund,
which has used 80% of its money to rescue two mid-sized banks in
northeast Italy — Veneto Banca and Banca Popolare di Vicenza. Both
these lenders now need more capital.
Intesa
has devalued its stake in Atlante by 33% and a source has said
Italy’s biggest bank, UniCredit, itself in serious need of help,
could write it down by as much as 70%. “They invested in failed
banks … you need to wait three years before assessing how much a
bank like that is worth,” Penati said.
Penati’s
comments echo previous criticism by Italian senior banker Giuseppe
Guzzetti, who helped set up Atlante I and Atlante II. Unlike Penati,
however, Guzzetti heaped much of the blame for the bad banks’
chronic underfunding on Credit Agricole and BNP Paribas, two of the
French banks most exposed to Italian sovereign and banking debt but
which refused to “do their part” in cleaning up Italy’s
financial system.
The
fact that private-sector institutions are refusing to provide more
money to Atlante I or II and are instead writing down their current
investments in those funds does not bode well for Italy’s chances
of rescuing its collapsing banks with the help of the private sector.
The original idea was that Atlante I and Atlante II would help create
a secondary market for Italian non-performing loans (NPLs).
Now,
that dream is in tatters. As shown by the recent farcical attempts to
rescue Italy’s third largest bank, Monte dei Paschi di Siena (MPS),
without a robust secondary market, the task of cleaning up Italy’s
bank balance sheets could prove near to impossible.
In
December, Penati’s plan to buy into Italy’s biggest-ever sale of
bad debts — €28 billion of loans written by MPS — fell apart
when the bank failed to find any other major investors. According to
Penati, the sale collapsed because it had been tied to a capital
raising that had been “badly devised and even more badly
executed.”
In
a statement that should send shivers down investors’ spines, Penati
noted that his job had taken him inside some dark corners of Italian
banking. “I had never looked at banks from the inside … I was
stunned they are run in this way,” he said.
Given
the sheer scale of the problem and the likely refusal of northern
European countries to hand over a blank check for Italy’s
government to rescue its broken banking system, especially in the
lead up to national elections in Germany, any lingering hope that
state intervention will do the trick is seriously misplaced, as
Penati himself warns.
As
eurocrats hone their skills at their time-honored game of
extend-and-pretend, Italy’s banking insiders are turning on each
other like ferrets in a sack. All the while, investors are voting
with their feet. As shown by Italy’s Target2 imbalances, the exodus
out of Italian assets continues to gather momentum and the spread
between the Italian 10-year yield and the German 10-year yield —
the ultimate indicator of the dreaded Doom Loop — just reached a
level that hadn’t been seen since November 2014.
It
is against this torrid backdrop that Italy’s biggest bank,
UniCredit, which ranks among the 30 global systemically important
banks (G-SIBS) identified by the Financial Stability Board — i.e.,
is genuinely too big to fail — is somehow supposed to pull off the
biggest capital expansion in Italian stock market history. If it
fails in that endeavor, it won’t be long before the dominoes begin
to fall.
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