The biggest problem facing European banks - one we highlighted most recently yesterday [9]when we showed the latest 20% surge in Spanish Banco Popular Non-Performing Loans to a fresh record - and one we have been covering since 2010 [10], which as of 2012 amounted to some $4.5 trillion [11]that needs to be "remedied" - is the staggering amount of bad debt on the books of Europe's numerous banks, the bulk of which especially in the periphery are cojoined with their sovereign host in an unbreakable bond which despite Europe's theatrical attempts to sever, only keeps getting stronger.
But while, so far at least, the conventional "under the table" can-kicking European bailout mechanism involved a process whereby banks would issue bonds with a sovereign "guarantee", then promptly repo them to the ECB at virtually no haircut as the Goldman alum-led central bank did everything in its power to keep injecting liquidity in an insolvent continental banking system (while everyone pretended to not realize what was going on as the "A-ha" moment of public epiphany would mean the emperor would suddenly have no clothes and the jig was up), this week things changed.
On Wednesday, Italy's government voted final approval to a decree hiking the value of Bank of Italy's share capital from €156K to €7.5 billion - something that had not been done since the 1930s. Of course, politicians determining the fictitious value of a central bank is one thing, as idiotic as it may be. However, what is truly preposterous is the covert bailout that accompanies the decree: a key part of the decision was setting a 3% ceiling on the stake that the bank's shareholders can own in the central bank. This means, as Reuters reports, that Intessa and UniCredit, currently the central bank's largest shareholders with stakes of 42 percent and 22 percent respectively - not to mention two of Italy's most NPL-heavy banks - will have to sell the bulk of their central bank "equity" stakes. And who will they sell them to? Why the central bank itself, and in return they will pocket up to €3.5 billion ($4.7 billion) from the sale of their central bank holdings. Said otherwise, Italy took not only bizarro accounting, but also monetary financing of insolvent banks by the monetary authority, and thus Italy's taxpayers, to the truly next level.
Some more details on this supremely grotesque, and certainly not last, bailout from Reuters [12]:
The decree says the banks have three years to comply with the new rules.
Should Intesa Sanpaolo sell a 39 percent stake, it could cash in up to 2.3 billion euros before tax according to analysts' calculations based on the new share capital of the Bank of Italy.
UniCredit could pocket a gross capital gain of around 1.15 billion euros from the disposal of its 19 percent stake in the central bank.
The only other lender with a stake in the central bank exceeding 3 percent is Carige which stands to reap a capital gain of 73 million euros if it sold part of its holding to comply with the decree.
And the cherry on top, confirming that Basel III is the biggest regulatory supervision joke conceived in Basel whose only purpose is to perpetuate a system of insolvent banks no matter the taxpayer cost, is that the capital gains from the sale would be used to boost the banks' core capital.
For those asking - yes: Italy's central bank just made sure Intessa and UniCredit pass Europe's stress test with flying color courtesy of a direct $4.7 billion deposit.
Sadly, this most brazen bailout will only benefit the abovementioned two banks: "The ownership limit will benefit only Intesa Sanpaolo and UniCredit," said Fabrizio Bernardi, analyst at Fidentiis Equities. "It will not help, however, Monte dei Paschi di Siena and Banca Carige, which are desperate for capital," he added. Monte dei Paschi has to raise 3 billion euros later this year to pay back state aid, while Carige needs to boost its capital by 800 million euros.
That's ok, we are sure the MIT diaspora of brilliant bankers who rule the world [13](literally) will come up with some another ingenious plan to mask the epic insolvency of Monte Paschi in the 11th hour, kicking the can for another several months, until the next leg lower in the European depression forces Europe's banks to get yet another bailout, and so on, until one day there are no more people left to fool.
Perhaps the piece de resistance is that not only is the central bank bailing out insolvent banks, but it is indirectly also funding the sovereign: the new law will also help public finances thanks to the taxation of the capital gain the banks will register.
Simply remarkable.
And it would have been even more unbelievable had nobody in Italy's parliament figured out this was simply yet another taxpayer funded gift to Italy's banks. Somebody, however, did. Guardian reports [14]that late on Wednesday, MPs of Beppe Grillo's M5S "stormed the government benches, put on symbolic gags and kept up a barrage of whistling after the speaker, Laura Boldrini, cut short the debate and ordered a vote on a complicated and intensely controversial measure to square Italy's public accounts. One of Grillo's followers said an MP from the governing majority had slapped her during the disorder. Opposition MPs claim that the measure would hand more than €7bn (£5.8bn) of taxpayers' money to the banks." Of course, what better way to fast-track yet another taxpayer bailout than to cut any debate short.
And this being Italy, where the phrase "political circus" is redundant, things just went uphill from here:
Members of the far-right opposition Brothers of Italy party showered chocolate coins on the government's representatives in the chamber and unfurled an Italian flag. After the vote was taken, Boldrini's party colleagues in the radical Left Ecology and Freedom (SEL) party broke into a chorus of the old partisan song Bella Ciao, prompting the M5S to respond with a rendition of the national anthem.
It is the first time since the foundation of the Italian republic after the second world war that a speaker has used the power to cut short a debate in this way. If she had not intervened, the decree at the centre of the dispute would have lapsed at midnight and Italian homeowners would have been landed with a bill for €2.2bn.
Enrico Letta's left-right coalition government won the vote by 236 to 209.
The decree was the latest stage in the government's tortuous efforts to fulfil an election pledge by Silvio Berlusconi to scrap an unpopular tax on first homes – and to do so without increasing Italy's already vast, €2tn public debt. Part of the cost is being passed to banks.
But the decree included provisions for an increase in the capital of Italy's central bank – a move that will swell the balance sheets of the commercial banks that are shareholders in the Bank of Italy.
Since the central bank is to use its statutory reserves for the increase, the M5S argued that it amounted to a gift of more than €7bn to the banks.
And they were right. But that's ok - at least everyone get's to pretend for a few months longer that the system, which now needs ever more creative bailouts, is solvent.