Is Europe In Trouble Again: Hints Of Portuguese, Italian Bank Bailouts Suggest Not All Is Well

In the aftermath of Germany refusal to allow Italy to breach Eurozone regulations, and provide its banks with up to €40 billion in new capital, Italy has unveiled a new track to handle its insolvent banks and as Reuters reports, the Italian government may have to inject capital directly into weaker banks to bolster their financial strength, a government source said on Thursday, adding it was waiting for the results of stress tests being conducted by European banking authorities. The results of the tests are expected to be published at the beginning of the third quarter.

The source told Reuters the government was also working on a plan to increase the firepower of bank bailout funds Atlante, which was set up in April to help lenders raise cash and sell bad loans, by 3-5 billion euros ($3.34-5.57 billion) by the summer. The source said the government was in talks with private pension funds to seek additional contributions for Atlante.

Other contributions were expected to come from the state lender Cassa Depositi e Prestiti and from a public company called Societa per la Gestione di Attivita.

And then, in a surprising follow up, the EU appears to have once again backtracked when Reuters headlines emerged suggesting that Europe would provide up to €150 billion for Italian banks"

  • LIQUIDITY SUPPORT FOR ITALIAN BANKS INCLUDES GOVERNMENT GUARANTEES OF UP TO EUR150 BILLION --EU OFFICIAL
  • BANK LIQUIDITY SUPPORT WAS REQUESTED BY ITALY FOR PRECAUTIONARY REASONS --COMMISSION SPOKESWOMAN

But...

  • LIQUIDITY SUPPORT APPLIES ONLY TO SOLVENT ITALIAN BANKS --COMMISSION SPOKESWOMAN

Which, technically is none of them, but practically any bank can - after the sufficient non-GAAP adjustments - pass for solvent.

So is another major bank bailout event on the horizon? It appears so. And Italy may not be alone. In comments that were little noticed yesterday, Germany's Schauble said that Portugal may see another bailout too, saying "It would have to apply for a new program, which it would get. But the terms would be severe and it is not in Portugal's interests."

As Reuters reported, German Finance Minister Wolfgang Schaeuble pressed Portugal on Wednesday to stick to its European fiscal targets and said that if it were to apply for a new aid program the terms would be harsh. Portugal's left-leaning government has set out to reverse its predecessor's austerity policies, aiming to grow its way out of trouble by boosting demand and set an example for other post-bailout euro zone countries.

"Portugal would be making a big mistake if it does not stick to its commitments," Schaeuble told a news conference in Berlin.

Pressed by journalists, Schaeuble stressed that Portugal would not need a new aid program if it sticks to EU rules. "They (the Portuguese) don't want it (a new package) and they don't need it if they stick to the European rules," he said. Portugal insists it will meet this year's budget deficit target of 2.2 percent, which is half last year's gap, and that no new measures will be necessary after solid budget execution in the first five months of the year.

The Portuguese finance ministry said Lisbon was not considering asking for any new bailouts and was working to meet its EU targets and to cut its budget deficit.

"Regarding the remarks made by Wolfgang Schaeuble, although he himself immediately corrected them, the finance ministry clarifies that no new aid program is being considered for Portugal," it said in a statement.

Still, was Schauble's Freudian slip earlier that "it would get a new program" if it only just asked for it a hint of things to come?

And then there is, of course, the world's most systemically risky bank, Deutsche Bank...

In retrospect, the UK may have exited Europe just in time.

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