Fears mount of multiple bank failures if Renzi loses referendum
Up to eight lenders risk being wound up if No vote triggers prolonged market mayhem
November 27th 2016 : Rachel Sanderson in Milan
Up to eight of Italy’s troubled banks risk failing if prime minister Matteo Renzi loses a constitutional referendum next weekend and ensuing market turbulence deters investors from recapitalising them, officials and senior bankers say.
Mr Renzi, who says he will quit if he loses the referendum, had championed a market solution to solve the problems of Italy’s €4tn banking system and avoid a vote-losing “resolution” of Italian banks under new EU rules.
Resolution, a new regulatory mechanism, restructures and, if necessary, winds up a bank by imposing losses on both equity and debt investors, particularly controversial in Italy, where millions of individual investors have bought bank bonds.
The situation is being closely watched by financiers and policymakers across Europe and beyond, who worry that a mass failure of Italian banks could trigger panic across the eurozone banking system.
In the event of a “No” vote and Mr Renzi’s exit, bankers fear protracted uncertainty during the creation of a technocratic government. Lack of clarity over a new finance minister may lethally prolong market jitters about Italy’s banks. Italian lenders have more than halved in value this year on concerns about their non-performing loans
Italy has eight banks known to be in various stages of distress: its third largest by assets, Monte dei Paschi di Siena, mid-sized banks Popolare di Vicenza, Veneto Banca and Carige, and four small banks rescued last year: Banca Etruria, CariChieti, Banca delle Marche, and CariFerrara.
Italy’s banks have €360bn of problem loans versus €225bn of equity on their books after successive regulators and governments failed to tackle a bloated financial system where profitability was weakened by a stagnant economy and exacerbated by fraudulent lending at several institutions.
But the market solutions, including a JPMorgan plan to recapitalise Monte Paschi and the efforts of a government-sponsored private vehicle Atlante to backstop problems at smaller banks, are looking shaky in the face of expected market turbulence if a “No” vote wins, said officials and bankers.
Lorenzo Codogno, a former chief economist at the Italian Treasury and founder of LC Macro Advisors, argued that the “biggest concern” in the aftermath of the referendum is its impact on “the banking sector and implications for financial stability”.
“The capital increases of Italian banks due to be announced right after the referendum may become even trickier than currently perceived in the case of a “No” vote”,” Mr Codogno said.
Monte dei Paschi di Siena is among eight Italian banks known to be in various stages of distress © BloombergSenior bankers and officials said that the worst-case scenario was where a failure of Monte Paschi’s complex €5bn recapitalization and bad-debt restructuring demanded by regulators would translate into a wider failure of confidence in Italy and imperil a market solution for its ailing banks.
Under this scenario, officials and senior bankers believe that all eight banks could be put into resolution. They fear that contagion from the small banks could threaten a €13bn capital increase at UniCredit, Italy’s largest bank by assets and its only globally significant financial institution, planned for early 2017.
Senior bankers argue that, irrespective of the referendum result, there is little incentive for investors to put fresh capital into Monte Paschi, Carige or the Veneto banks when Italian listed mid-sized banks are on average only trading at about a quarter of tangible book value.
“The issue is whether Siena gets done or not,” said a senior official, reflecting how Monte Paschi has become a proxy for the Italian financial system. “Without Siena on the line, I am not worried. With Siena on the line, I am worried.”
This person added that, should Monte Paschi’s deal fail, “all theories are possible” including “a resolution of the eight banks”, especially if a “No” vote led to Mr Renzi quitting office and a period of protracted political uncertainty.
preads on Italian government bonds versus German Bunds rose above 190 points on Friday, a level not seen since October 2014, as markets priced in expectations of turbulence.
The prospectus for the recapitalization of Monte Paschi, which includes a debt for equity swap that begins on Monday, warns that the vote weighs on its chances of success. The Bank of Italy has warned of market volatility around the vote. Critics of Mr Renzi have accused the central bank of fear-mongering ahead of the vote.
But the threat of resolution has loomed large in his premiership as it has coincided with the advent of the single banking supervisor that has taken a tougher stand on Italy’s non performing loans.
Bankers and officials can envisage a technocratic government agreeing with Brussels and Frankfurt a systemic “bail-in” of vulnerable Italian banks which emerged among Europe’s weakest in stress tests two years ago and again this summer. Under a bail-in, which forces losses on bond holders, Brussels could allow for some compensation for vulnerable retail investors, officials said.
Nicolas Véron, senior fellow at think tank Bruegel, argued that “if anything the ECB has been very lenient in addressing the system-wide banking situation [in Italy] that has been very visible since the comprehensive assessment two years ago”.
“It is a very difficult moment but it is not sustainable. The problem of banking fragility is not going away. It is not something that resolves itself with time,” Mr Veron said.
https://www.ft.com/content/e588ea6a-b49f-11e6-961e-a1acd97f622d
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by Mike Bird
Nov 21, 2016 10:24 am ET
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In the latest bond market selloff, a new trend is becoming ever more clear — a divergence between southern Europe’s two biggest economies, Italy and Spain.
Italian 10-year government bond yields are currently at their highest since early 2012, around half a percentage point above their Spanish counterparts with two weeks to go until the country’s constitutional referendum. In the selloff since the U.S. election, Spanish yields also ticked up, but at a slower pace than Italy’s.
The country goes to the polls Dec. 4 to approve or reject reforms to the country’s upper house of parliament. A “yes” vote would weaken the country’s senate, reducing its control over some policy areas and meaning it can no longer oust governments.
In times of economic stress, yields on the European periphery — the more economically troubled countries that suffered most during the euro sovereign debt crisis — tend to rise relative to countries in Europe’s core, particularly Germany.
“The significant underperformance of [Italian government bonds] in the last two months is by and large a reflection of the higher political premium in the run up to the Italian referendum,” said a note from Morgan Stanley’s interest rate strategists late last week.
A loss — currently projected by most polls — would weaken Italian Prime Minister Matteo Renzi’s economic reform efforts. Earlier in the year, Mr. Renzi suggested he would resign in the event of a “no” vote.
Italy’s brand new 50-year bond is another illustration of the challenge for investors. The debt security has dropped in price by more than 12% in the last month.
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But it isn’t just a relative absence of political crisis that’s helping Spain — the country’s economy has also shown more strength than Italy’s. HSBC’s analysts believe that in time Spanish bond yields could converge towards French levels.
Spain was considered one of the most damaged European economies during the eurozone sovereign debt crisis, but has rapidly repaired its reputation among investors.
Though the economy took an enormous hit during the euro crisis, the country’s GDP per capita is still 14.2% higher than when the euro was launched in 1999, whereas Italy’s is 3.8% below those levels.
“With the political situation in Spain having turned less uncertain lately, the looming December vote has driven Italy’s policy uncertainty higher,” said Bank of America Merrill Lynch analysts in a recent note.
“We are no longer in the peace and quiet’ of 2015,” the note added. “From now to the referendum, we think Italy will be walking on thin ice.”
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