When the rescue caravan is underway, Italy could end up bailing out one Italian bank after another – after all, why should the Genoese get a worse deal than the Venetians, Bert Flossbach asks in an essay for finews.first.
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Without the ECB’s helping hand, the yields on Italian government bonds would be considerably higher, as would the lending rates for Italian companies. Artificially low interest rates, however, also keep companies that are actually bankrupt above water, thereby «zombifying» the economy and banking system. Italy officially has around 350 billion euros in non-performing loans.
In addition to the recapitalisation of Monte dei Paschi bank, Italy's rescue of the Venetian banks Banca Popolare di Vicenza and Veneto Banca also bent European Banking Union rules, which have actually required creditor participation (i.e. «bail-in») since the beginning of 2016.
Including guarantees, the potential government cost of rescuing the two regional banks could reach 17 billion euros. The Governor of the Italian central bank, Ignazio Visco, is demanding that the harsh bail-in rules be replaced by a European deposit protection scheme, which would make savers in the rest of Europe liable for Italian banks.
«Italian taxpayers also have no reason to be happy»
This probably brings a flush of anger to the cheeks of Spanish bank creditors, who were recently bled dry by a bail-in for Banco Popular. Italian taxpayers also have no reason to be happy, since in addition to assuming the bad loans of the two regional banks, the government gave away their good business to Italy's largest bank, Intesa Sanpaolo, for one euro.
The two Venetian banks, however, are just the tip of the iceberg when it comes to troubled regional Italian banks featured prominently in the press. The Genoese bank Banca Carige, established in 1483, is another example. With total assets of around 26 billion euros, Banca Carige is as large as the Sparkasse CologneBonn, the second largest German savings bank in terms of total assets.
«The bank’s bonds provide a perfect example of moral hazard»
Even though Banca Carige’s loan book – gross customer loans exposure before write-downs – has dropped sharply from 31.3 billion euros to 21.7 billion euros since 2012, its non-performing loans have jumped from 3.2 billion euros to 7.3 billion euros. This means that one third of the gross customer loans exposure is non-performing and 22 per cent of the loans are still non-performing after taking account of the write-downs that have been made. This corresponds to more than 15 percent of total assets, or almost twice the bank’s reported equity capital.
The bank’s bonds provide a perfect example of moral hazard. Due to the high probability of default, the bank’s subordinated bonds, which essentially have the same liability as equity capital, are trading far below par value. The remaining bonds, on the other hand, are trading without a significant discount. Clearly, investors are firmly convinced that the Italian government will also bail out this bank and service the bonds at face value to avoid a revolt by small investors.
«The Italian government could be forced to rescue one bank after another»
Once the rescue merry-go-round has started, the Italian government could be forced to rescue one bank after another – after all, why should Venetians be treated better than the Genoese? And then the Portuguese will ask why the Italian rescue model is not also being used there – a question that the creditors of the Spanish Banco Popular, who were recently bled dry, are also likely to be asking themselves today. European law has become politically pliable, forcing the ECB to maintain its role as the saviour of last resort.
Bert Flossbach ranks among Germany's most successful wealth managers. In 1998 he founded Cologne-based Flossbach von Storch together with Kurt von Storch, which he still manages today. Previously, he worked for Goldman Sachs in Frankfurt from 1991 to 1998 and for Munich-based Matuschka Group from 1988 to 1991. He studied economics at the University of Cologne and wrote a PhD on portfolio management concepts in managing private client funds, in Innsbruck from 1990 to 1992. Flossbach von Storch is one of Germany's largest bank-independent wealth managers. With more than 170 employees and assets of more than 33 billion euros, it remains in the hands of its co-founders and executives.
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