by Don Quijones, Wolf Street:
There’s a pervasive sense of inevitability to Italy’s banking crisis.
Without a taxpayer-funded bailout that directly contravenes the Eurozone’s new bail-in rules, the world’s oldest surviving bank, Monte Dei Paschi, could soon be out of business. Shares of the decrepit financial entity have long been reduced to a penny stock. So far this year, they’ve lost 78% to close on Tuesday at an inconsequential €0.28.
The closer it comes to its end, the louder the calls for its rescue. Last week saw two out of three of the members of the institutional triad formerly known as the Troika — the ECB and the IMF — lend their support to a taxpayer funded bailout of Italy’s banking system. So, too, did the biggest U.S. bank by assets, JP Morgan Chase.
All that was needed was for Europe’s most influential bank, New York-based Goldman Sachs, to give its blessing. That came on Monday in a report whose conclusion is fittingly Goldman-esque: saving Italy’s banks is not just necessary; it would be a bargain for all concerned. The authors breezily point out that the €210 billion euros of non-performing loans (ha, the ECB says €360 billion and growing every time someone looks at it) on the books of the banks could all be wiped out with the equivalent of just nine months of ECB President (and former Goldmanite) Mario Draghi’s bond purchases.
Here’s the FT:
With the ECB hoovering up €120bn per year of outstanding Italian government bonds as part of its quantitative easing scheme, “by the time QE is over – not sooner than end 2017, on our baseline scenario – around a fifth of Italy’s public debt will be sitting on the Bank of Italy’s balance sheet”, writes Francesco Garzarelli at Goldman…
Bringing the entire net stock of bad loans onto the government’s balance sheet would be equivalent to 9-months worth of BTP [Italian government bond] purchases by the ECB…
With four days for authorities to come up with a plan to inject capital into Monte dei Paschi, Goldman adds that some form of “state intervention is both “likely and, at this late stage, desirable”.
Desirable for whom?
According to Goldman, Italy as a united whole – from the poorest to the richest, the oldest to the youngest – all will benefit from wiping the bank’s — or banks’ — slate clean. An added bonus, the report contends, is that Italy’s troubles are largely contained to its domestic economy. “Italians have lent mostly to themselves: the country’s net international investment position is comparatively small,” the report says.
This is a disingenuous falsehood that has been peddled across multiple media for weeks now. The contagion risk of Italian banks and their bonds is significant, particularly for banks in France and Germany, but also in Spain, the UK, and the US.
However “cheap” the eventual bailout may be — and one can be sure it will be considerably more expensive than the original estimates — it will do little to remedy Italy’s chronic financial ills, which include a stagnant economy, a public debt that exceeds 130% of GDP, a currency that is too strong, a zombified housing market, 35% youth unemployment, and entrenched political corruption. As The Guardian‘s Larry Elliot writes, Italy’s non-performing loans reflect a “non-performing economy.” They are “the symptom of the problem, not its cause.”
By bailing out the bondholders of the banks, all Italy’s government can hope to achieve is to consign its most urgent threat — the collapsing banks — to the back burner for a little while. It will also insulate foreign banks heavily invested in Italy’s financial sector from any undesirable knock-on effects.
But that is all a bailout will achieve: to buy more time, with an obscene amount of public funds.
If bailing out banks were the perfect cure-all to a country’s financial ills, how is it that Portugal’s financial sector is seemingly in need of fresh funds, just five years after receiving €78 billion in bailout money from taxpayers elsewhere?
In a recent report, Barclays warned that Portuguese lenders could need up to €7.5 billion to resolve a “systemic banking crisis” that was bringing the country under close market scrutiny.
“Some banks are in need of a large capital injection,” said Antonio Garcia Pascual, chief European economist with Barclays. “This means any material losses from the sale of Novo Banco [the supposedly good bank spawned from the loins of the now-defunct Espirito Santo] could end up having to be met by the sovereign [i.e. taxpayers], as the capacity of Portuguese banks to absorb them is rather limited.”
In Spain, meanwhile, the banks are not yet begging for public money, but there are ominous signs on the horizon. In a desperate bid to placate the markets, the country’s fifth biggest bank, Banco Popular, recently announced layoffs of up to 3,000 workers, but to little avail. Arguably the most exposed bank to Spain’s crisis-drained real estate sector, Popular’s shares continue to languish at a historic low of €1.22 a piece; two years ago they were worth close to €6.
Even for Spain’s biggest bank, Santander, the problems are stacking up, with significant exposure to the turbulent financial markets of Brazil and the UK, and to subprime auto-lending in the US.
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