European Finance crisis: As Italian banks beg for bailout the infection spreads to Spain.

by Phil T Looker

Italy teeters on the brink again (Image source: Still from The Italian Job, Daily Mail)

Total chaos reigns in European banking stocks this morning as Italian bank Monte Paschi became insolvent when a private sector bailout plan failed. Monte Paschi shates and bonds crashed in European stock markets, the Italian Stock Market was in turmoil and the Italian crisis spread to Spanish banks are also being hit following a European Court ruling on mortgage fraud went against them.

On Monday night, Italy’s finance minister Pier Carlo Padoan confirmed Italy is preparing a €20bn rescue fund for MPS and other weak lenders as the chances of a successful €5bn private recapitalisation of the Siena-based bank recede.

By the evening of Thursday at the latest, it should be clear whether MPS, which was founded in 1472, will have been rescued by the private sector via a €4.5bn debt-for-equity swap and funds from anchor investors including the Qatar Investment Authority. As of Monday only €200m had been committed to the swap, suggesting the chances of pulling off the rescue are slim, said people close to the deal.

MPS’s debt-for-equity swap will close at 2pm Italian time on Wednesday. If it goes badly MPS could already ask the government to step in, said one Italian official.

According to an Italian official only about €2bn of the €20bn will be used for liquidity guarantees, and the rest for recapitalisations and for compensating some retail bondholders. Other banks will be rescued on a case-by-case basis over the coming months now that Italy has a precedent with which to defend against EU bullying. The €20bn rescue fund will abide by EU rules on so-called burden-sharing, which force losses on junior bondholders (small investors, in other words the neo - Fascist EU is protecting the big players again. Benito Mussolini would have been proud.

Italy’s banks currently have one of the highest toxic debt ratios in Europe at 16.4 per cent of total credit outstanding, more than three times the European average of 5.4 per cent, according to Moody’s.

The nationalization, of Italy's three largest banks seems imminent following a Reuters report that the ongoing, JP Morgan-led attempt to put together a private sector bailout of Monte Paschi had failed.

According to Reuters, Qatar's sovereign wealth fund, long considered as the most likely anchor investor with a €1 billion allocation in any rescue plan cash call, decided it is unwilling to invest in the Italian bank, meanwhile Monte Paschi has been unable to find a replacement investor willing to put money in its privately funded rescue plan, less than 24 hours before the offer ends.

As a result, the bank's share issue, which closes at 2 p.m. (1300 GMT) on Thursday, has drawn very little interest from investors.

The bank now needs to raise €5 billion by the end of this month to avert being wound up. The Italian government, which earlier today was given permission by the European Central Bank to issue €20 billion in public debt to use for bank bailout purposes, is expected to step in this week and nationalize the bank.

The approval came after the ECB first refused to extend the deadline for a €5bn recapitalisation of Monte Paschi before the end of the year and fears mounted the bank’s liquidity levels were becoming critical. MPS has lost €14bn, or 11 per cent of its total deposits, from January to September 2016 and warned its liquid reserves would fall under the required level should it suffer another €10bn of deposit outflows under a “stress” scenario calculated by the ECB. That news triggered another rush to withdraw deposits and sent the stock plunging to record lows, shortly before the government agreed that taxpayers would shoulder the burden of the insolvent bank's debts.

Other banks expected to benefit from Italy's state aid in addition to Monte Paschi include Veneto Banca, Popolare Vicenza, Cassa di Cesena, Cassa di Rimini and Cassa di San Miniato.

While economic confidence in the USA is at record levels following the election of Donald Trump, and in the UK, post Brexit, the economy is booming (the pound is still looking weak against the dollar because both have surged against other currencies, particularly the Euro) but elsewhere https://www.bloomberg.com/news/articles/2016-12-21/spanish-banks-lose-eu-case-over-mortgage-interest-repayments-iwyp8kih Bloomberg reports Spanish banking stocks falling after the European Court of Justice ruled that the May 2013 cut-off point for unfair home mortgage payment reimbursements is illegal.

Borrowers who paid too much interest on home loans pre-dating a May 2013 Spanish ruling on so-called mortgage floors are entitled to a refund from their banks, judges at the EU Court of Justice ruled in Luxembourg Wednesday. The court said that a proposed time limit on the refunds is illegal and customers shouldn’t be bound by such unfair terms. Banco Sabadell SA fell as much as 7.5 percent, while Banco Popular slipped as much as 10.5 percent, the largest decliner in Spain’s Ibex 35 benchmark.

"This comes as a surprise and in a bad moment for Spanish banks as most of them would have to make extra provisions to pay for this,” Daragh Quinn, an analyst at Keefe Bruyette & Woods, said by phone. "It will mean pressure on capital generation and profits in the fourth quarter."

The EU court case comes as Spanish banks are under pressure from low interest rates and weak demand for credit, affecting their traditional business of lending. With 521 billion euros, home loans are one of the largest parts of Spanish bank lending business as they grew their real estate exposure during a construction boom in the country that burst at the end of the last decade. Some banks are still making provisions for bad loans, which also adds pressure to profit.

Banco Popular Espanol, Caixabank and Banco de Sabadell suffered most. Santander shares fell 1.25% and Bankinter by just 0.1%.



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