Despite – or perhaps due to – Italy’s failed attempt to slide a state-funded €40 billion recapitalization attempt past Angela Merkel while blaming it on Brexit, and coupled with a bailout proposal to provide €150 billion in liquidity to insolvent banks, overnight we got yet another confirmation that the biggest risk factor for Europe is not Brexit but Italy, where yet another failed bank was bailed out. As the FT reports overnight, Atlante, Italy’s privately backed €5bn bank bailout fund which was created in April to stem the threat of contagion from struggling lenders and whose assets turned out to be woefully inadequate, took control of Veneto Banca after a €1bn capital increase demanded by EU bank regulators attracted zero interest.
This is good news for Veneto Banco and bad news for all other insolvent banks, because the fund, known as Atlas in English, was intended to hold up the sky for Italian banks. Instead it is now practically out of funds, having depleted more than half of its war chest after taking control of Popolare di Vicenza, another regional bank, last month.
As the FT adds, Lorenzo Codogno, an economist and former treasury director-general, said: “Italian [and to a lesser extent European] banks have entered into a negative loop where they cannot ask for private capital as there is no investor appetite and without capital they cannot provision or write off NPLs.”
This means the only hope is public-funded bailouts, however that is banned by eurozone regulations.
A further problem for Italy is that its debt capacity as a sovereign has now topped out, and any new debt incurred to bailout banks will promptly result in downgrades, and a threat to state solvency: “Any increase in government debt we see as a negative development,” said Ed Parker, head of Emea sovereign ratings at Fitch, which rates Italy at triple B+, two notches above junk. Colin Ellis, chief credit officer in Emea at Moody’s, said: “Italian debt stock is already high and it would be credit negative to add to that pile of debt. The big problem is the level of uncertainty in Italy and the wider eurozone right now.”
Meanwhile, a desperate Italy fully aware of what is coming, is considering increasing Atlante’s firepower by a further €5bn or more by drawing money from pension funds, the state or foreign investors, say bankers. Atlante is due to launch a second fund focused on buying NPLs next month. Authorities in Italy are racing to create a bigger cushion for the banks before publication of stress test results, expected at the end of July. Senior bankers fear Italian lenders will emerge poorly from the tests, triggering another slide in share prices.
Of course, if that is the only catalyst, there is no need to worry: there is no way that Mario Draghi will unleash the dominos that will topple the Italian banking system, when it was he himself who as Italy’s central banker allowed these banks to pile up the unprecedented amount of bad loans. As such expect all Italian banks to pass.
The real threat is if the local population wakes up to the risk of holding their savings in a financial system that is now teetering on the edge, something Renzi himself admitted when he said that he “hoped to use a liquidity backstop to contain investor panic, which could result in a run on deposits and affect banks’ liquidity.” Because even if it buys up every bond, loan and stock in the world, the ECB will not be able to fix the public’s loss of trust in fractional reserve banking.
Full article: Italy Just Bailed Out Another Failed Bank, May Use Pension Funds For Future Bank Rescues (Zero Hedge)