The First Casualty Of Brexit: Italy Prepares €40 Billion Bank Bailout

Tyler Durden's picture

Barely has the market had time to digest last week's Brexit vote by the UK, a vote which may never actually be implemented if the "sturm und drang" campaign unleashed by the EU and the ECB on UK capital markets succeeds in changing the mind of enough "Leavers" to the point that the entire referendum is called off and Boris Johnson never triggers the Article 50 clause, and already Europe's most financially troubled nation, Italy, is using Brexit as a pretext to unleash a €40 billion ($44 billion) bailout of its insolvent banks.

As the WSJ reported earlier, the Italian government is considering a capital injection for the country’s banking system, after Italian lenders were hit by a sharp selloff in banking stocks Friday, triggered by Britain’s vote to leave the European Union. Of course, Brexit has nothing to do with it: instead, as everyone knows by now, Italy's banks are beset with €360 billion (and rising) in bad loans, some 18% of total bank balance sheets, chronically poor profitability amid record-low interest rates, thin capital buffers and high costs. It was precisely these concerns that the recently created Atlante "bad bank" was supposed to address until it became painfully obvious that its total war chest of €4.25 was woefully inadequate to put even the smallest dent on Italian bank insolvency.

According to Ambrose Evans-Pritchard, the country is the first serious casualty of Brexit contagion and a reminder that the economic destinies of Britain and the rest of Europe are intimately entwined. Morgan Stanley warned in a new report that eurozone GDP would contract by almost as much as British GDP in a "high stress scenario".  “When Britain sneezes, Italy catches a cold. It is the weakest link in the European chain,” said Lorenzo Codogno, former director-general of the Italian treasury and now at LC Macro Advisors.

So, in the spirit of never letting a Brexit crisis go to waste, Italy has decided to use the British referendum as the scapegoat and demand nearly ten time as much in new capital to be used (and abused) as Italy's banks see fit. As the Telegraph adds, an Italian government task force is watching events hour by hour, pledging all steps necessary to ensure the stability of the banks. “Italy will do everything necessary to reassure people,” said premier Matteo Renzi. “This is the moment of truth we have all been waiting for a long time. We just didn’t know it would be Brexit that set the elephant loose,” said a top Italian banker.

According to the WSJ, the chairman of Lower House’s Finance Commission, Maurizio Bernardo, confirmed that the government is studying options to support the banking sector, including a capital injection, and said a law decree “with measures going in that direction” could be approved by the end of this week. So far no decision has been taken as the government is monitoring how markets respond after Friday’s steep downturn.

They said how such an intervention would be implemented is unclear at this stage.  it is also unclear how such a direct state recapitalization of Italian banks using public funds would be permitted by current EU and ECB regulations, which prohibit state bailouts of insolvent banks, although Europe has a long and illustrious history of finding massive loopholes to that particular prohibition. Last but not least it is unclear how existing stakeholders, shareholders, bondholders and uninsured depositors, would be impaired under such a bailout. 

Italian officials are studying a direct state recapitalization of the banks, to be funded by a special bond issue, the Telegraph adds. They also want a moratorium of so-called ‘bail-in’ rules and bondholder write-downs, but these steps are impossible under EU laws. Mr Renzi raised the subject urgently at a meeting with German Chancellor Angela Merkel and French president Francois Hollande at a Brexit summit in Berlin on Monday.  “There has to be a suspension of the bail-in rules and state aid rules at the highest political level in the EU, otherwise I don’t see how this can work,” said Mr Codogno.

The new bail-in reform this year has brought matters to a head, catching EU authorities off guard. It was intended to protect taxpayers by ensuring that creditors suffer major losses first if a bank gets into trouble, but was badly designed and has led to a flight from bank shares. The Bank of Italy has called for a complete overhaul of the bail-in rules.

The WSJ adds that the government could invoke an exception to this rule under European law during exceptional market conditions. “I believe the measures could include a mix of public and private funds,” Mr. Bernardo said.

Meanwhile, Italy has certainly picked a great catalyst on which to blame the crisis that has been sweeping its banking system for the better part of the decade. The aftershocks of the U.K.’s vote to leave the EU in a referendum Thursday continued to rattle financial markets Monday, sending European shares sharply lower, with bank and travel stocks leading the declines.

Banca Monte dei Paschi di Siena SpA shares were down 12.2% on Monday, while Intesa Sanpaolo SpA was down 12.5%. Italy’s FTSE MIB lost 12.5% on Friday, with banking stocks the worst hit.

To be sure, yet another bailout would be a welcome move for banks which have been struggling to reduce their massive exposures to soured loans. As reported previously, investors have so far been unwilling to pay the prices banks were asking to sell their bad loans meaning Italian banks are stuck: they can't mark their bad loan to market without taking a massive hit to capital, and there are no willing buyers at current prices. 

How did Italy arrive at the €40 billion numbers? Just like in the case of Neil Kashkari's "back of the napkin" TARP calculation which estimated US bank needs at $700 billion or 5% of the total $14 trillion in residential and commercial mortgages, so Italy is using a similar rule of thumb.  Consultants have calculated that to bring around €200 billion of bad loans—the gross amount of soured loans where debtors are considered insolvent—closer to market values, the banking system would need a collective write-down of bad loans of about €40 billion. Some estimates place the write-down needed at roughly €30 billion.

And there's your €40 billion bailout total.

Banks have so far refused to take such a drastic action as they believe the market price of bad loans should be higher, in particular considering the value of collateral backing part of those bad loans. The problem is that in recent weeks most potential hedge fund buyers have balked at these bank offer prices.

For now Italy pretends to be in denial:

“Italian banks have the capacity to face this crisis on their own,” said Giovanni Sabatini, general manager of Italian banking association ABI, commenting on the option of government support to the sector.

However, following the next near-death experience of an Italian bank, the official narrative will quickly change.

Currently, it is practically impossible for Italian banks to raise capital. They are caught in a pincer as the ECB simultaneously demands compliance with tougher capital adequacy buffers, in some case demanding fresh infusions of capital three or four times.  The banking squeeze has become politically explosive in Italy after thousands of small depositors were wiped out at four regional banks late last year. They were classified as junior bondholders, even though most of them were just ordinary savers who did not realize what was being done with their money.

Curiously, according to Codogno, the ECB is "unwittingly destabilizing the banks in an overzealous attempt to make Europe’s banks safer." It is almost as if Mario Draghi had greenlighted Brexit as the designated "crisis" that would be used to enable the circuitous bailout of Italian banks, the same banks of which Draghi was regulator during his tenure in the Bank of Italy, and whose actions have led to numerous lawsuits questioning the legality of the central bank under Draghi.

Italy is now paralyzed under the existing eurozone structure. Analysts say it desperately needs a US-style bank rescue along the lines of the ‘TARP’ in 2008, which used federal funds to mop up bad assets and stabilize the banks. This is forbidden by the eurozone. The likely outcome is that Italy's PM Renzi will be "forced" to take matters into his own hands and enact a unilateral sovereign rescue of the Italian banking system in defiance of the EU, unless he wins concessions soon from Brussels. Those who know him say he will not go down in flames for the sake of European ideological purity.

As a result, Brexit will be just the scapegoat used by Renzi and Italy to circumvent any specific eurozone prohibitions. And if it fails, all Renzi has to do is hint at a referendum of his own. Then watch as Merkel scrambles to allow Italy to do whatever it wants, just to avoid the humiliation of a potential "Italeave."

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gatorengineer's picture

why are they publicizing it?  Havent they learned anything from Amerikka?

peddling-fiction's picture

To make it into a bigger crisis.

Lonesome Crow's picture

Did the NY Fed deliver Germany's gold?

Manthong's picture

“the Italian government is considering a capital injection for the country’s banking system”

What a hoot.

Is that “capital” pixie dust, fairy sprinkles, elfin powder or what?

Maybe they have made a deal with Quark for bar franchises along the Italian Riviera in exchange for billions worth of gold-plated latinum.


BurningFuld's picture

Clearly the solution here is student loans. Fuck they are slow at this shit.

Haus-Targaryen's picture

Isn't this something like 3000% of Italy's fancy new Atlas bailout fund? 

NidStyles's picture

Bankers are drooling at the chance to enslave the Italians even more so. Fuck these bankers and their shitty companies. Shit companies deserve to fail. That includes Kike Banks.

walküre's picture

Italy is a bottomless pit already. Can't take blood from a stone.

thinkmoretalkless's picture

No the goose that lays the "capital" eggs is working overtime

bamawatson's picture

"vote which may never actually be implemented if the "sturm und drang" campaign unleashed by the EU and the ECB on UK capital markets succeeds"


nibiru's picture

I told you that Mario is crazy and has even smaller balls than Janet.


Now bail-out, soon bail-in and we are going to end up with ECB having more corporate bonds than amount of ETFs in BOJ wallet.

WTFUD's picture

Lender of only resort! Who of sound mind would lend money to an Italian Bank, any Bank? Don't answer , it's rhetorical . . ANYONE WHO HAS AN ACCOUNT WITH ONE!

The fact is EVERY EU/UK Bank is Bust and hence the loyalty to Uncle Sam for fear of implosion; get Goldman on the phone , they know the Muppets in these Marikeets who'll post us, cough up the anti. Fool me once . . . fuck this is the 4th time.

nmewn's picture

I'm thinkin McConnell & Ryan can fold this puppy right on into the Puerto Rican bailout bill and have Obozo sign off on it, it'll be like a twofer!

I mean, everbuddy luvs Faaarrreee! shit! ;-)

CheapBastard's picture

"There's never been a better time then now to be a banker."


Ya know, no matter how much fraud and theft and/or "bad" investments bankers make, the government bails them out...unlike the average middle class citizen who gets raped with the losses that are passed on to them by their own government in favor of the Bankers.


So I have to agree with those who favor hanging bankers from the nearest tree. I also agree with those who support Donald trump who favors throwing the Establishment out of DC.

And have no doubt,

Hillery = Establishment

knukles's picture

Are you inquiring as to the 440's, coin bars or all those silly little burlap sacks with funny little nuggets in them?

knukles's picture

The only Brexit I know be a probem is;  "Dat I don gibs a shit if mah EBT card no work, Iah am hungray an I wants my mofahfuckin Brexit now, yo!

gatorengineer's picture

Wonder if the Brits knew thats all his momma had before they voted...

Antifaschistische's picture

Those damn BRITS!!  If only they had voted 'in' Italy wouldn't need this $40 Billion!!!    lol.... can tell, everyone's playing the 'blame it on Britain'

Sam Clemons's picture

What happened to letting businesses go bankrupt?  It's like everyone in charge forgot how things worked for millenia.

Luc X. Ifer's picture

yeah, i mean are people just so fucking stupid, who's are these 40 billions?! so if they banks need them it means banks don't have them, so from where the money - from your pockets, idiots. Basically forced transfer of wealth at gunpoint.

sun tzu's picture

The politically connected banksters and cronies don't go bankrupt anymore. They are bailed out by the middle class.

RawPawg's picture

just gotta wait for that ink to dry before they deposit it,i reckon

peddling-fiction's picture

It is only zeros and ones. A simple SQL statement creates the "money" in a database and then it can be transferred.

thinkmoretalkless's picture

Really...they act like they are really doing something productive for that "capital" they pull out of their ass.

Veruca Salt's picture

What happened to Atlas?

maskone909's picture

Fuckin bailins i knew it. Uk better pray to god db cs and ubs dont go under before brexit is official

ebworthen's picture

How many Italian individuals or households are getting bailed out?  Oh right...banksters paradise, serfs hell.

peddling-fiction's picture

Only the kosher nostra gets bailed out.

ArgentoFisico's picture

A mafia guy go to jail and there he gets to know a banker (strange, ok). When out he says to his fellows: "guys, we are in the wrong business"

ArgentoFisico's picture

on friday the ECB has provided 399 billion euro to the banks,  at 0% interest rate?!

peddling-fiction's picture

Wait till that interest rate rises to double digits.

sun tzu's picture

It will never be repaid, just like in the US. 

peddling-fiction's picture

Yep, sounds like a skipping record that is starting to bug us all.

Listen to this great guitarist if you want to take a break from all this doom and gloom.

AbbeBrel's picture

Double digits, LOL. You mean the Interest rate rises to .01 % ?

The key thing here is that- if an Bankster offers you something SPECIAL for a bit higher interest, Run The Other Way. Go to cash or buy gold. Otherwise you will get slammed into something that is the equivalent of a "bond". That is where the sheeple got sheared once again, only in Italy (same story as for Spain):

"thousands of small depositors were wiped out at four regional banks late last year. They were classified as junior bondholders, even though most of them were just ordinary savers who did not realize what was being done with their money."

MFL8240's picture

Let the bank go under.  Not possible the bank went down over an event that happened 3 days ago.  The debt was a mess before but how else for the globalist swill to lie to the public?

Hungman's picture

Let the fireworks begin.

Philo Beddoe's picture

So, that is about $650 for every Italian.  Seems like good value. 

maskone909's picture

Can i get half of an italian for 325?

WmMcK's picture

Not the half you want.

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) Jun 27, 2016 7:36 PM

Yup this is all because of the Brexit.  Europe was doing fantastic until Britain ruined everything in their racist, jealous rage /sarc

knukles's picture

Seee see see se see yaeh, see!
That's right, the EU has the New "It's Bush's Fault!"

               "It's Brexit's Fault!"


mgbkurtz's picture

How do you trade it?

NoWayJose's picture

I prepped for Brexit by going to 100% cash plus my stack. I wouldn't rush out to buy Italian banks but you will start to see more central bank 'stick saves' like this so I think the trading bottom is near and it is OK to nibble on decent EU and UK divvy stocks. If things collapse further then interest rates will go even NIRPier and divvy stocks over 4% will look good. I don't believe in the US dollar or Treasuries or $50 oil or China, so I am avoiding those. But I am only nibbling, and keeping plenty of cash for now. If the US dollar keeps rising it makes for some good foreign stock bargains, so prepare for that to happen by scouting out solid global companies.

Government needs you to pay taxes's picture

When the Fedcoats .zero your brokerage account to cover their free shit promises, I'm gonna laugh at you.

Joebloinvestor's picture

Can't wait for Greece to leave as they stick it to the EU.

Will be like the old cafeteria line days when they told the cashier the guy behind them was paying for lunch.

The Duke of New York A No.1's picture

Hmmmmmmm ... Italy just bailed out their banks with a giant slush-fund a couple months ago ... I guess the giant slush-fund wasn't big enough.