Bank Bailout Italian Style

The Italian banks have so far escaped the ‘iron fist’ of Brussels, but the ever-stricter treatment may lead to exit from the EU.

The stuttering stability of the Italian banks seems to have been resolved in the short term, bringing a dynamic increase in value to the banks’ shares on the stock exchange. Banca Monte dei Paschi, which has been struggling for a long time, is being reconstructed with state funds. The state is capitalising Italy’s third largest bank based on its assets, which is also one of the world’s oldest, still active, financial institutions with a date of foundation in 1472, to the tune of EUR 5.4 billion. Two smaller regional banks have been partly acquired by the market leading, Italian Sanpaolo Intesa (alongside which a ‘bad bank’ has been created for the doubtful receivables, at a further cost of EUR 22 billion).

That is good news in the short run, as the systemic risk affecting the banking system, where the volume of non-paying loans reached EUR 360 billion, is reduced significantly. The solvency of 114 of 500 banks stuttered as they lack resources to meet their own obligations because their debtors are insolvent. In addition to the aforementioned Tuscan bank, in the case of Banca Popolare di Vicenza and Veneto Banca the ratio of ‘bad debts’ was more than double the liquid equity of the credit institutions. 

Fortunately, now only smaller, less significant banks remain problematic credit institutions. It seems that the possible collapse of the Italian financial system has been solved. However, what about the issue of the regulations which should manage such and similar situations in the European Union? All banking regulations after the 2007-2008 financial crisis were adopted with the objective of making sure that credit institutions in grave situations are no longer saved using taxpayers’ money. Unfortunately exactly that happened again and what makes it particularly problematic is that it happened in a country where the national debt is extremely high (reaching 132% of GDP) and the ratio of the non-performing loans is still 15%. Thus, there is still an abundance of non-performing loans.

The management of these huge financial burdens, however, can cause further serious problems. German Finance Minister Wolfgang Schauble harshly criticised the small loophole in the regulations that allowed Brussels to give its blessing to the Italian bank bailout programme. According to the Brussels regulations applicable to EU banks, bailing out larger financial institutions is a ‘public interest’ due to their size, so they may be capitalised. However, smaller banks go bankrupt or undergo liquidation proceedings just like any average business.  

The Italian government used an ingenious trick and classified the two institutions into the group of financial institutions performing critical functions so, based on an EU position statement of 2013, the two Venetian credit institutes became eligible for state assistance. According to Schauble, the protection of the taxpayers is more important than the protection of creditors or large investors (the deposit insurance fund guarantees savings up to EUR 100,000 throughout Europe). The approval of the European Commission creates a dangerous precedent, allowing member states to resolve a crisis situation as they please, applying their own national laws rather than relying on the common and, in this case, stricter, European legislation.

The situation is sensitive as compliance with the stricter European norms may further strengthen the already growing Italian Euroscepticism and could lead to an early election. More and more Italians are disappointed in the expected improving effect of the joint European values on their living standards. The accumulated real economy output is less today than a decade ago, national debt is rising and unemployment is over 11%.

However, it is unknown in what condition the Italian economy would be if it had not joined the European Union and the Eurozone, though more and more people believe that, like Great Britain, they would have been better off had they kept at least their national currency and been left to pursue a monetary policy to boost the economy. According to the ‘Movimento 5 Stelle’ (Five Star Movement) that has the second largest support in Italy, that would definitely have been the right choice: The political group founded by Beppe Grillo is in fact fully committed to the ‘Ita-leave’. After Brexit, an Italian exit would cause unpredictable outcomes in the global financial markets, bringing advantages for the gold supporters, as well as for digital money (like Bitcoin) investors again, who have been arguing for the acknowledgement of payment instruments independent from politics and government manipulation for decades.

 

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