Italian Bank Debt Changes Game for Renzi With Voters on the Hook


Renzi EuropaThe world’s oldest bank is a reminder of one of democracy’s oldest lessons: Costing voters money can also risk costing you your job.
Banca Monte dei Paschi di Siena SpA was founded in 1472, but has a very modern Italian problem. The lender has about 10.7 billion euros ($12 billion) of bonds with an initial investment designed to attract ordinary families, data compiled by Bloomberg show. It’s just the tip of the iceberg: Italian banks together have sold more than 180 billion euros of similar securities as depositors looked for better rates of return.
Prime Minister Matteo Renzi is now faced with the prospect of forcing losses on people who bought bonds seemingly safe in the knowledge they were putting their cash into assets as secure as money in the bank. European legislation since the beginning of the year has changed the game. When banks get into trouble, bond investors are among those on the hook rather than taxpayers, a process known as “bail-in.”
“Renzi has taken a very strong position in saying he doesn’t want any bail-in of any creditor of any bank,” said Nicolas Veron, senior fellow at the Peterson Institute for International Economics in Washington and the Brussels-based Bruegel research institute. “I’m not sure what he’s trying to achieve by making this an issue of principle.”
Renzi’s Referendum
The problem with bail-in is that the same people who would suffer losses also have votes. Renzi is staking his career on a referendum to overhaul the political system that is expected to take place in October. In the background, the anti-establishment Five Star Movement is gaining ground, taking over the running of Rome’s municipal government last month.
Bank of Italy Governor Ignazio Visco said last week that state intervention to support Italian banks may be needed because there’s a risk that the nation’s financial industry could be undermined. Finance Minister Pier Carlo Padoan said at the same event in Rome that the government was working first on providing tools for a market-led solution.
Padoan told reporters at a meeting of finance ministers in Brussels on Monday that Italian banks are not on the agenda of the gathering.
Italy’s banks are saddled with about 360 billion euros of non-preforming loans, a legacy of years of economic stagnation. Unlike Spain’s bailout in 2012, the Italian authorities didn’t force lenders to resolve the situation. The European Central Bank has now taken over supervision of the country’s biggest lenders and is demanding action, backed by stress tests, whose results will be announced July 29.
Debt Dilemma
Siena-based Monte Paschi, Italy’s third-largest bank, is at the crux of the country’s debt dilemma. The ECB has asked the lender to offload more than 14 billion euros of gross non-performing loans over three years. Monte Paschi reported 46.9 billion euros of soured loans at the end of 2015. About half of that is covered by reserves, meaning the bank is still carrying the loans at about double what they would be worth if they were sold. An official at Monte Paschi declined to comment for this story.
“The other big Italian banks can probably work their way through the bad loans, reserving, selling some off over time,” said John Raymond, an analyst at CreditSights in London. “The number’s so big at Monte Paschi, and they don’t make enough money to earn their way out, so they need some kind of support.”
There’s also little prospect of a structural change at the bank through mergers or acquisitions, he said.
Monte Paschi has a 2.16 billion-euro floating-rate junior subordinated note outstanding that it issued in 2008 at 100 cents on the euro and is now quoted at about 49 cents, according to Bloomberg valuation. The initial investment required was 1,000 euros. Meanwhile, banks are still making their bonds available to individual investors.
Mediobanca SpA, Italy’s biggest investment bank, sold 200 million euros of subordinated bonds due in June 2026 also requiring a minimum investment of 1,000 euros. The bond wasn’t sold through branches. An official for Mediobanca declined to comment.
Europe’s Bank Recovery and Resolution Directive makes state recapitalization of solvent banks contingent on the results of stress testing. Taxpayers can be used to cover a capital shortfall without triggering resolution when it is needed to “remedy a serious disturbance in the economy of a member state and preserve financial stability.”
‘Lesson Learned’
“We will get the results of the stress tests, which the European banking supervision carried out, in the second half of this month and before we have the results, we shouldn’t speculate,” German Finance Minister Wolfgang Schaeuble says before meeting with euro-area peers in Brussels on Monday.
“We all know that the European rules we created as a lesson learned from the financial and banking crisis were created to avoid a repetition,” he said. “It offers various possibilities to respond adequately to any situation.”
Aid provided under the legislation still has to meet EU state-aid rules, though, and these normally require shareholders and junior creditors to share losses, a move the Italians are maneuvering to avoid.
“What we have now is an opportunity to overhaul the Italian banking system,” said Alberto Gallo, head of macro strategies at London-based Algebris Investments. “It’s not zero cost but it needs to be done. Retail holders complicate matters but they can be protected and that will have to be done separately.”

John Glover, Bloomberg