On Thursday the parliament approved government intervention to rescue the national banking system in the amount of €20 billion. It is yet another defeat for the Renzi-Padoan-Gentiloni government in financial policy, after a series of reversals that have filled the pages of newspapers in recent months.
The government had been reluctant to make a long-lasting move, in the presence of a banking system patently unable to make its way alone in the crisis. The revulsion against any public intervention by the members of Renzi government had to surrender to facts, but it did so only at the last minute and in more precarious conditions than if the move had been prepared calmly.
The decision comes at a dramatic moment for the Monte dei Paschi.
In a few hours, we’ve already learned that the hypothesis of an increase of only private capital has essentially failed, since the conversion of the subordinated bond initiative collected in total only about €1.7 billion, far shy of the €5 billion needed. It should be emphasized that since the crisis erupted, the Sienese institute burned through €8 billion.
On Wednesday, the institute announced that it has liquidity only for four months (just recently it was 11), in relation to the fact that during the year the bank had to record significant deposit withdrawals by customers; if withdrawals continue, the liquidity would further decrease. We also remember that the bank has seen its share price fall by almost 90 percent over the course of 2016.
Meanwhile, it’s not entirely clear how they will resolve their problem of bad loans by the end of the month.
Renzi, we should remember, a few months ago had portrayed the institution’s private salvation as a done deal, having mobilized for this purpose and with great fanfare the cream of international finance, JP Morgan.
But in reality no major player has wanted to take part in the game, starting with Qatar, which was heralded as largely on board. Government intervention should also be able to cover the capital holes of the two Venetian banks; for the two institutions, which are launching a merger, it will take at least another €2 billion.
Then there are the Carige and the four provincial banks (Etruria, Marche, Cariferrara, Carichieti) for another €3 billion, plus other smaller institutions.
So, for the moment, the amount received would seem sufficient to the task.
But we must consider that the total of non-performing loans amounts to approximately €350 billion and that the latest estimates of the financial requirements to cover the hole, net of funds already allocated and the presumed encashment, are around €60 billion. So the current intervention is woefully inadequate to remedy the situation.
Then we remember that before long the Basel Committee, which is discussing bank capitalization, will issue its ruling, which could result in an outflow from the Italian banks of tens of billions more, albeit within of several years. The allocation of €20 billion must be approved by Brussels and Frankfurt.
Meanwhile, €20 billion will have an important impact on public debt and the payment of interest on the same. Among other things, the possibility of reducing the the ratio of debt to GDP. We must see how it will close the deal on possible losses of small bondholders who own subordinated securities and are estimated to be approximately 40,000, a small army. Germany is up in arms.
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