Italy Races To Defuse €200 Billion Bad Loan Time Bomb With "Bad Bank"

Tyler Durden's picture

When Portugal “surprised” senior Novo Banco bondholders with a €2 billion bail-in late last month, the market got an unwelcome reminder that euro periphery banks are far from “solid.”

Novo was supposed to house the “good” assets salvaged from the wreckage of failed lender Banco Espirito Santo, but as it turned out, a lot of those “good” assets were actually bad, and Novo ended up needing to plug a €1.4 billion hole. Initially, the plan was to sell assets but seizing €2 billion from bondholders ended up being a whole lot easier and far more efficient.

News of the bail-in came just a week after Lisbon announced that a second bank - Banif - would need state aid after running out of cash to repay a previous cash injection from the government.

As we head into the weekend, periphery banks are back in the spotlight, only this time in Italy where PM Matteo Renzi is scrambling to put the finishing touches on a plan to guarantee hundreds of billions of NPLs sitting on the books of Italian banks.

Talks with the EU Commission “have already dragged on for two years,” FT notes and need to be concluded over the next few days lest “the whole initiative should collapse.”

Of course Renzi missed what amounted to a deadline on “fixing” the problem under the old rules governing bank resolutions.

One reason the Novo Banco and Banif bail-in and bailout (respectively) were pushed through in what appeared to be a kind of haphazard, ad hoc fashion was because new rules came into effect on January 1 that would have put uninsured depositors on the hook for losses. The same rules require 8% “of a bank’s liabilities to be wiped out before public money can be used,” FT adds.

In short, creditors at Italy’s banks would need to take a hit before Renzi’s government would be allowed to extend state aid. That is unless Italy can devise some kind of end-around, which is precisely what Renzi is attempting to do now.

“Even if approved, the scheme will not be a panacea for the problems afflicting the banks because Italy will have had to limit the impact of the scheme significantly to comply with EU state aid rules,” FT goes on to note. “While previous discussions had focused on the setting up of a sector-wide bad bank, Italy has now shifted to proposing a lighter-touch guarantee system in an attempt to avoid it being designated by the commission as state aid.”

So “state aid” that isn’t “state aid.” Got it.

"Even if we reach a deal over the weekend it would not be decisive... (the bad bank) should have been done before the new rules came into force,” Renzi said on Thursday, acknowledging that Italy may have missed its window.

Shares in Italian banks have been in a veritable death spiral of late but got a bit of respite on Thursday as news of the potential deal crossed the wires. “The situation is much less serious than the market thinks,” Renzi said, in what is perhaps the surest sign yet that things are indeed very serious. He added that his economy minister is "working miracles" to solve the banking sector's €200 billion euro bad loan problem.

"The recent turbulence around some Italian banks shows that our credit system – solid and strong thanks to Italians’ extraordinarily high household savings – still needs consolidation in order for there to be fewer but stronger banks," the PM wrote in an op-ed for The Guardian. "When the market speaks, as it has done in recent days, it is right that bank executives and shareholders comprehend the need for serious and swift intervention." 

Shares of Monte Paschi - the world's oldest bank - surged 43% yesterday but as Bloomberg's Mark Cudmore notes, the stock is still worth less than 1% of its 2007 peak value.

On Friday, things seemed to be moving towards an agreement. "[We're] working as quickly as we can and we have been working on a continuous basis for months to reach an agreement with the Commission," Italian FinMin Pier Carlo Padoan said in Davos.


So why is the EU suddenly willing to concede to the plan, Cudmore asks? Well first because this is all unfolding against a backdrop of record low interest rates. If rates were to ever rise (chuckle) then these sour loans would turn even sour-er-er. 

Additionally, you might recall that one of the biggest stumbling blocks for Europe during the sovereign debt crisis was the link between the banks and sovereigns. Governments depended on domestic banks to buy their debt, but as borrowing costs rose, the banks took a hit on their government bonds, inhibiting their ability to continuously finance government deficits, creating a decisively negative feedback loop that very nearly drove the PIIGS to the brink of implosion. Well three and a half years after "whatever it takes" and Italy is still sitting on a debt pile that amounts to 133% of GDP. If the banks are saddled with €200 billion in bad loans, they may not be able or willing to roll that debt, which sets the stage for Italian borrowing costs to rise.

Commenting on the EU's about face, Cudmore notes that "the authorities’ ability to change their mind as the situation evolves may temporarily help reassure the markets, but ultimately it could shake confidence in the euro."

Right. And Italy's beleaguered banks aren't out of the woods yet. “I wouldn’t say it is over,” Francesco Galietti, an analyst at Policy Sonar in Rome told The Guardian. “Everyone is giving the government some extra hours to come up with a solution. Once there is a solution, it will either stabilise the situation or things will come sharply down.”

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Sanity Bear's picture

if they need a bad bank they can have BofA

Squid-puppets a-go-go's picture

all creditors are created equal. but some are more equal than others

firstdivision's picture

Draghi will eat it.   He likes it.  He really likes it.

BandGap's picture

Why is Guido eating his sunglasses?

Early Retirement's picture

So the ECB takes money from the taxpayers to give bankers Euros, bankers who then give the Euros to a friend in exchange for a Note, then the Note is revealed to be worthless as the friend simply absconded with the Euros, minus the bribe paid to the banker, of course, then the taxpayers replace the deposit so the banker can do it again.

Winston Churchill's picture

You have a bright future in finance.

My father wanted me to become a banker but I chose engineering instead.

I should have listened.

bamawatson's picture

heck, driving a train is lots more fun than sitting in a stuffy ole bank

RiverRoad's picture

Central and all banksters love it when the sheeple go belly up and they can grab the collateral.  But they refuse to go down when they screw up; so they keep blowing their balloons back up again.  No medicine for them.  No siree.  How nice to just keep printing yourself new money when yours is gone.....

new game's picture

my father was an engineer, i choose real estate, i should have followed his foot steps...

true dat...

Ghordius's picture

I fail to see where exactly "the ECB takes money from the taxpayers...". it is a bit more subtle then that, isn't it?

"Commenting on the EU's about face, Cudmore notes that "the authorities’ ability to change their mind as the situation evolves may temporarily help reassure the markets, but ultimately it could shake confidence in the euro." "

Cudmore, those are not "the authorities". this is the Italian government, backed, in this, by the elected Italian Parliament. yup, the ability to change it's mind has a name. sovereignty. wink, wink

poor Cudmore, the contortions he has to make in order to avoid writing what he does not like

as a reminder, Draghi is in full speed ahead QE. 80% of that QE is done by the member National Banks. one of the biggest of them is... the Italian National Bank

don't mistake the fleet for the ships. where Italy has a long tradition of treating it's regional banks (as the Germans) as a fundamental and critical part of the republic

and this has meant this kind of "operations", many times in history. I think the Monte dei Paschi di Siena has seen something like seventeen such operations in it's life

so Renzi will try the "bad bank" solution. if it does not fly... well, he has options. and some of them aren't really what those "markets" want, so they have a strong incentive to shut up

Mark Cudmore's moaning sounds... exactly like that

Germany is looking at this Italian "manouver", and might follow up, too, with the LandesBanken

Early Retirement's picture

The ECB is directly buying bank paper using EU common funds.

Ghordius's picture

you don't seem to know even the first thing about central banking, do you? "EU common funds"?

have you ever heard the phrase "Central Bank printing"? a damn CB does not need to draw from funds. it prints, it creates from nothing the money to do that

where do you think does fiat currency come from? why do you think so many here moan about "debt money"?

Vinividivinci's picture


Atomizer's picture



  • Knock, knock
  • Who's there? 
  • IMF Economic hitman here bringing you some more fucking monopoly money. 
khnum's picture

Eu 200 000 000 took me one second to type,problem solved in 1 second by the right keyboard

Joe A's picture

"So why is the EU suddenly willing to concede to the plan, Cudmore asks?"

Cause the EU needs to pay Turkey 3 billion Euro for their (non-existing) efforts to halt the flow of migrants/refugees into Europe. EU members states need to pay for that. Italy was dragging its feet. I bet soon they will cough up now a deal is in the making.

Diplodicus Rex's picture

"...Italians’ extraordinarily high household savings..."

Shit, I hope they don't keep their savings in the banks.

And its gone................

Don't they watch the news? Didn't they hear about the bail-ins in Greece and Cyprus? Or is it just that they think it can't happen to them?

NoDebt's picture

They're socialist.  They're OK with the government taking their stuff for the greater good.

Wow72's picture

Your Quote: "Don't they watch the news?"


Everyone is BTFD in America? Think Americans are taking their money out of the Banks yet?  There is enough ignorance to circle the globe at least a few times.

Joe A's picture

How dare they save money!!1!!1! It is unpatriotic! What do they think, that their earned money is theirs? Ha!

Niall Of The Nine Hostages's picture

It is right that bank executives understand the need for intervention. Renzi has a point.

Of course, the sort of interventions that might actually set Italy straight would result in those bank execs going to Siberian prisons for a very long time. Those aren't in the cards.

youngman's picture

Italians talk with their hands..what did he say..what did he say

Atomizer's picture

Denis the menace holds a common core math study group. 

Fixed income markets are in a state of transition. Dealers have continued to cut back their market-making capacity in many jurisdictions. Demand for market-making services, in turn, continues to grow. This report - prepared by a Study Group chaired by Denis Beau (Bank of France) - explores recent trends in fixed income market liquidity, following up on earlier analysis by the CGFS.

21Jan/Fixed income market liquidity

jubber's picture

ftsemib up 500

To Hell In A Handbasket's picture


It looks like it's going to be another round of sodomy for the plebs of Europe, whilst the banksters gorge on their savings. Alas Mr Draghi will not let his countrymen go down. Draghi will send in the IMF/World Bank Economic-Hitmen first, to scalp the Italian public, then Italy's nationalized/government owned assets. Maybe these cockroaches will "do an Ireland" on Italy? IE: Get the Italian politicians to RETROSPECTIVELY change the laws, making the Italian tax-payers liable for unsecured loans. If the Republic of Ireland politicians can sign into law retrospectively, making the Irish taxpayer liable for the unsecured loans of bond-holders, then anything is fucking possible. The only thing guaranteed, is that the tax-payer will lose out. This much I know for certain.

Atomizer's picture

You and I see through this fog of bullshit. Well stated post. Thank you. 

Montani Semper Liberi's picture

 Just finished The Inferno, and there was a special place in hell for usery.

iamtheeggman whooooooooooooo's picture

When "good" banks go bad!