Italy Tasks JPMorgan With Creating A €50 Billion Bank Bailout

Three months ago, when Italy's renewed bank troubles were reemerging again, and the country unveiled its first, and certainly not last,  "bad bank" in the shape of the "Atlas" (or Atlante) bailout fund, we - as well as everyone else - mocked it for one obvious reason - at only €5 billion it was far too small to make an impact, as we explained in "Size Matters: Analysts Mock Italy's Tiny "Atlas" Bailout Fund Meant To Support €360BN In Bad Debt."

In late June, following the Brexit vote when the Italian bank undercapitalization and the nation's massive bad debt problem was once again exposed, it became all too obvious just how undercapitalized Italy truly is when in one attempt after another, Italy's Prime Minister Matteo Renzi begged Europe to allow him to implement a €50 billion bailout (not a bail-in) of Italy's banks contrary to the new BRRD regulations.

While so far Renzi had been repeatedly shut down by either Merkel, or Schauble, or Dijselbloem (even as both Deutsche Bank and the ECB have shown an eagerness to rescue Italy), overnight a white knight may have emerged for Italy, because as the Telegraph revealed that JPMorgan has been appointed by the Italian government to work on plans to set up a bank to buy troubled loans from the country’s lenders at approximately 20% of face value.

The gross notional size of Italy's Bad Bank #2 would be €50 billion, or 10 times greater than the "Atlas" iteration, unveiled just three months earlier. However, the actual taxpayer money at risk would be "only" €10 billion. As part of JPM's plan, the government would acquire some of the bad loans at a price of 20 cents in the euro. The state-backed entity would then work through the loans to either sell them onto other investors, hold them to maturity if there is a chance of borrowers paying them back, or offer debt relief if the customers are in such poor financial shape they cannot repay the loans, the Telegraph adds.

Even with far less net taxpayer funds at risk, there is still a risk it will not be implemented, in part because other ideas are also under discussion, but also because the Italian government is currently at loggerheads with the EU over the scheme.

As we have documented over the past month, European rules as per the BRRD mandate that private investors such as shareholders and bondholders have to pay up before the taxpayer does, in an effort to avoid a repeat of the bailouts of the financial crisis. However, demanding that it is different from Cyprus and Greece, where bail-ins slammed local banking sector, Italy’s government does not want to inflict harm on the households across the country who invest their savings into those bonds, over fears of a self-fulfilling bank run in Europe's third largest economy.

It hopes that this scheme to split the cost of recapitalisation between the government and the banks will show some thought has been given to the new rules, even if it does not fully comply.

So far there have been no comments from the Eurozone finmins, and certainly not from Germany, on whether this bailout scheme is more agreeable than previous proposals. We expect nothing formal to emerge until the latest EU stress test is published at the end of this month, showing the poor state of Italy's five biggest banks’ capital positions.