Italian banking shares were up on Monday after Italy reached a deal on two failed regional banks, Veneto Banca and Banca Popolare di Vicenza. They’ll be given a five billion euro bailout by the Italian government.
The European Central Bank on Friday night had warned the banks were failing or likely to fail.
As Wolf Richter points out “This is the first Italian bank liquidation under Europe’s new Single Resolution Mechanism Regulation. The ECB explained:”
_“The ECB had given the banks time to present capital plans, but the banks had been unable to offer credible solutions going forward.
“Consequently, the ECB deemed that both banks were failing or likely to fail and duly informed the Single Resolution Board (SRB), which concluded that the conditions for a resolution action in relation to the two banks had not been met. The banks will be wound up under Italian insolvency procedures.”_
Both banks will be liquidated and the good assets sold to a rival bank for a nominal sum.
Italy’s foreign minister Pier Carlo Padoan told reporters “The Government used and fully respected European regulations in the best way possible, exploiting all measures and using all possibilities available today from the difficult and complex set of regulations which are often difficult to implement at the European level.”
Italy’s prime minister said the rescue protects savers and ensures the good health of the country’s banking system.
But analysts say it makes a mockery of Europe’s new banking union which established common rules for all euro zone banks.
Bloomberg’s Ferdinando Giugliano wrote:
“Rome will effectively by-pass the EU’s “single resolution board” which is supposed to handle bank failures in an orderly way and the “Banking Recovery and Resolution Directive,” which should act as the euro zone’s single rulebook.”
Deal to add up to 17 billion euros to outstanding state debt
The Italian banking system is choked by a high level of bad loans and the prospect of some relief was enough for investors to buy up Italian bonds despite the additional borrowing such a rescue entails.
“Negative consequences for the Italian state will be offset by the positive consequences for Italian government bonds in terms of reducing the already high uncertainty surrounding this issue,” said BBVA strategist Jaime Costero Denche.
Indeed, after an initial spike in early trade, Italian government bonds were among the best performers on the day by noon.
The yield on 10-year Italian debt dropped 3 basis points to 1.88 percent, while most other euro zone government bond yields were lower 1-2 bps.
“There is the danger that other banks need state support, but I think there’s more clarity now that there is a solution for the banking sector,” said ING strategist Martin van Vliet.
Italy’s bond yield spread over Germany see-sawed from 168 bps in early trade to 164 bps by midday.
BBVA strategists believe that if the entire 17 billion euros is used, it would add about 1 percentage point to the country’s debt as a percentage of its economic output. Italy’s debt-to-GDP ratio is among the highest in the world at 132.6 percent at the end of 2016, according to EU data.
Italy was also in the news on the political front, its centre-right parties proving the big winners in mayoral elections on Sunday, partial results showed.
The vote is likely to put pressure on the centre-left government ahead of national elections due in less than a year.