The Real Endgame For Italian Banks

The new head of UniCredit, Italy’s biggest bank, has implored the EU to take a more lenient stance on rescuing the country’s troubled banking sector, as The FT reports Mustier urges Brussels should look to a controversial 2004 French government rescue of Alstom as a model.

Jean-Pierre Mustier, a former senior banker at Paris-based Société Générale, said Alstom — the French engineering group bailed out by a controversial €2.5bn government aid package — was an example where “the state intervened . . . and the company thrived afterwards.”


European authorities have balked at any taxpayer rescue of Italian banks that do not adhere to strict new EU rules that limit Rome’s ability to bail out financial institutions without first forcing losses on private creditors.

The 13% surge in Italian bank stocks this week - the most since 2011...

...offers a further hint that, as Bloomberg's Mark Cudmore explains, there’s only one viable outcome to the fiasco with Italian banks, and it will ultimately be a positive catalyst for global risk assets even if negative for the euro.

It may seem like there are many different ways this critical situation can pan out, but all bar one would be fatal for the euro zone. The only option is to bail out the banks without “bailing in” investors.


Of course the banks will be rescued. This column has previously outlined how Italian banks will be saved precisely because the alternative is the collapse of the Italian economy, which would likely precipitate the breakup of the euro.


So the crunch decision is whether bond investors share some of the cost of that bailout. Since January, the EU has legislated that investors must be bailed in, and bail-ins have happened elsewhere, e.g. 54% haircut for senior creditors of Heta Asset Resolution in Austria.


Surely the EU can’t blatantly break its own new rules just for Italy? That would set a bad precedent, completely undermine its authority, create large moral hazard within the euro zone, and weaken the euro.


But it can. And it most likely will. Because the alternative is much scarier. In Italy, too much of the subordinated bank debt is owned by private individuals. If they’re made to pay for this, then Italy’s constitutional referendum in October will fail, resulting in Prime Minister Renzi resigning and the collapse of the government.


Italy will be in crisis, and anti-EU sentiment will gain a significant boost at a time when the euroskeptic Five-Star Movement has already become the most popular party. Again, the euro zone will be in serious jeopardy.


So there’s really only one path to be followed: the one that doesn’t threaten to break up the euro zone. The Italian banks will be bailed out and investors will not be bailed in.


This will be a boost to global equities and positive- yielding bonds, yet another boon for emerging markets. It will be less good for the euro, which is trading within 1% of its 18-month high versus a trade-weighted index.

"Whetever it takes" ..."when it's important you have to lie" ... and "rules are for suckers" ... we just wonder how all those haircut-template'd Cypriot depositors will feel about bailing out their EU 'partners' in Italy?