Size Matters: Analysts Mock Italy's Tiny "Atlas" Bailout Fund Meant To Support €360BN In Bad Debt

As we warned all the way back in 2012, European NPL's are a ticking time bomb. Yesterday Italy announced that it had taken the long-anticipated first step to alleviate investor concerns surrounding the stability of the banking system, namely that Italian banks have roughly €360 billion in non-performing loans. Local banks, insurers, and asset managers have agreed to fund a €5 billion backstop for these troubled loans. Speculation of the imminent deal had sent Italian (and European) bank stocks soaring yesterday.

The deal is named Atlante, or Atlas, after the mythological god who held up the sky. This is appropriate, as it truly is a myth to believe that setting aside 1.5% to resolve a €360 billion bad debt problem will solve anything. In return for setting up the fund, the government has agreed to update bankruptcy laws to bring them more in line with European norms in order to help with the sale of bad loans.

To provide some context as to just how much of a farce this is, €5 billion will barely cover the loans that are already categorized as bad debt, let alone provide any type of offset for the hundreds of billions in overdue, restructured, and substandard loans.


Here is a breakdown of impaired loans by bank as of 2014, showing how vast and wide spread an issue Italy has on their hands. UniCredit - which incidentally is one of the biggest sources of funding - leads the way with over €80 billion in impaired loans just by itself.


The FT reports that Monday's meeting was tense, as Ignazio Visco, the governor of the Bank of Italy reportedly told bankers they had no choice but to give money to ensure financial stability. Visco however never laid out plans to restructure the weak lenders or providing any details of the return they would get for their investment.

After Sunday's announcement that a 54% haircut had been imposed on creditors of Austrian bad bank HETA ASSET RESOLUTION AG, the first bail-in under new Eurpean rules, we surmise that Italian banks creditors are in for the same treatment in the not too distant future.


But what may be the worst news for the "titan", is that after so much hype, the market appears disappointed. As Bloomberg adds, the agreement between Italian officials and bank executives to create a multibillion-euro fund to offload bad loans is a step in the right direction, investors and analysts say.  But the pact may not be enough to reassure investors that the pain for Italy’s troubled banking sector is over even as Italian bank shares extend gains following the announcement late Monday.

Here are some of the initial sellside reactions:

Commerzbank (Michael Leister)

  • It’s certainly positive that the Italian government and the private sector remain committed, but market is unlikely to treat it as key break-through
  • Fund size probably small; for BTPs, NPL problem remains the key risk

Lonsin Capital (Marco Elser)

  • Size of the fund very small, with at least twice the amount needed to make a difference
  • Says the problem is not the capital, but the legislation and how resources are employed; Italy should find a legal way to solve the issue of non-performing loans

ADM Investor Services International Ltd (Marc Ostwald)

  • Rescue fund ’’a classic six of one, and half a dozen of the other’’; while putting these measures in place is a step in the right direction, there is a lot of skepticism that a EU5b fund would be adequate when the non performing loans at Italy’s banks are more than EU300b
  • Adds that the size of the fund, even if it was much larger, is not necessarily the decisive factor; ’’much depends on how it is managed, above all in terms of the legal backdrop for resolving NPLs’’
  • Expects short-term relief for bank stocks, ’’still a mountain to climb tho’’

Barclays (Antonio Garcia Pascual)

  • At first sight, the new plan to clean up nonperforming assets in banking system appears to be a step in the right direction
  • It is still early to state whether it will change the lending dynamics and growth prospects of Italy or pass EC filter on state aid rules and whether the sovereign will eventually need to incur some of the recapitalization costs
  • Another critical piece for a swift resolution of problem loans would be new legislation to speed up the recovery of problem loans as, currently, the expected recovery period on collateral for problem loans is far too long