This article is from the source 'guardian' and was first published or seen on . It last changed over 40 days ago and won't be checked again for changes.
You can find the current article at its original source at http://www.theguardian.com/business/2017/jun/26/italy-bank-eu-rescue-veneto-banca-banca-popolare-di-vicenza
The article has changed 7 times. There is an RSS feed of changes available.
| Version 0 | Version 1 |
|---|---|
| Italy's €17bn bank job: self-preservation at a long-term EU price? | Italy's €17bn bank job: self-preservation at a long-term EU price? |
| (35 minutes later) | |
| The European Union authorities seem to be making up the rules on banking bailouts as they go along. The latest Italian example – the winding-up of Veneto Banca and Banca Popolare di Vicenza – drives a coach and horses through the idea that taxpayers must be spared financial punishment, as far as possible, when lenders can’t fund themselves. | The European Union authorities seem to be making up the rules on banking bailouts as they go along. The latest Italian example – the winding-up of Veneto Banca and Banca Popolare di Vicenza – drives a coach and horses through the idea that taxpayers must be spared financial punishment, as far as possible, when lenders can’t fund themselves. |
| The two banks are being wound down via a deal that separates the good parts of the loan books from the bad. The healthy portion will be shoved into Italy’s largest retail bank, Intesa Sanpaolo, which has been given €5.2bn (£4.6bn) by the government to ease the process. The Italian state will then take responsibility for the bad loans by agreeing €12bn of guarantees. | The two banks are being wound down via a deal that separates the good parts of the loan books from the bad. The healthy portion will be shoved into Italy’s largest retail bank, Intesa Sanpaolo, which has been given €5.2bn (£4.6bn) by the government to ease the process. The Italian state will then take responsibility for the bad loans by agreeing €12bn of guarantees. |
| That potential €17bn bill represents a direct exposure for Italian taxpayers and – critically – it is so large because holders of the senior bonds, or IOUs, in the two ailing banks aren’t being wiped out. Instead, the bonds will become payable by Intesa, which means they ought to be safe. | That potential €17bn bill represents a direct exposure for Italian taxpayers and – critically – it is so large because holders of the senior bonds, or IOUs, in the two ailing banks aren’t being wiped out. Instead, the bonds will become payable by Intesa, which means they ought to be safe. |
| So what happened to the rule that all bondholders must be obliterated before taxpayers contribute? That principle was introduced in the EU after the 2008 global financial crisis to quell the justified outrage that taxpayers, in effect, had been underwriting private sector banks’ bad bets. On this occasion, however, only shareholders and junior bondholders are being cleaned out. | So what happened to the rule that all bondholders must be obliterated before taxpayers contribute? That principle was introduced in the EU after the 2008 global financial crisis to quell the justified outrage that taxpayers, in effect, had been underwriting private sector banks’ bad bets. On this occasion, however, only shareholders and junior bondholders are being cleaned out. |
| The Italian government, it seems, has been able to plead successfully that the “national interest” will be served by protecting the senior bondholders because the local economy in the Venice region would suffer if Veneto Banca and Banca Popolare di Vicenza collapsed chaotically. And the European commission has swallowed this line with the imaginative explanation that the two banks are too small to matter from a competition perspective. In other words, one side says the ailing duo are critically important, while the other says they’re irrelevant. It makes no sense. | The Italian government, it seems, has been able to plead successfully that the “national interest” will be served by protecting the senior bondholders because the local economy in the Venice region would suffer if Veneto Banca and Banca Popolare di Vicenza collapsed chaotically. And the European commission has swallowed this line with the imaginative explanation that the two banks are too small to matter from a competition perspective. In other words, one side says the ailing duo are critically important, while the other says they’re irrelevant. It makes no sense. |
| Being generous, one could argue that the Italian authorities have been pragmatic since, unusually in a EU country, small savers often own bonds directly. What’s more, by rescuing senior bondholders, they have averted the danger that capital would flee from other weak Italian banks. That was enough to boost the bond and share prices of most Italian banks on Monday. | Being generous, one could argue that the Italian authorities have been pragmatic since, unusually in a EU country, small savers often own bonds directly. What’s more, by rescuing senior bondholders, they have averted the danger that capital would flee from other weak Italian banks. That was enough to boost the bond and share prices of most Italian banks on Monday. |
| Yet one cannot get around the fact that the spirit of the relevant EU banking directive has been ignored. The rules apply, except when they don’t, it seems. That has two important consequences. First, as Capital Economics argues, the “doom loop” between Italian banks and the Italian government remains a worry. If taxpayers can be on the hook at two regional banks, they may also be exposed if and when the banks are more important and the sums significantly greater. | |
| Second, as the thinktank also points out, the cause of banking and fiscal integration in the eurozone has just suffered a serious jolt. In the next round of collective risk-sharing, eurozone states are supposed to guarantee deposits in each others’ banks. It is now hard to imagine Germany rushing to join such a scheme. | Second, as the thinktank also points out, the cause of banking and fiscal integration in the eurozone has just suffered a serious jolt. In the next round of collective risk-sharing, eurozone states are supposed to guarantee deposits in each others’ banks. It is now hard to imagine Germany rushing to join such a scheme. |
| So forget the market’s initial cheery response to this Italian bank job: a short-term problem has been fixed only by raising major long-term uncertainties. That does not sound like progress. | So forget the market’s initial cheery response to this Italian bank job: a short-term problem has been fixed only by raising major long-term uncertainties. That does not sound like progress. |