While Critics Say It Has Killed Banking Union, Stock Markets Get Buoyed By Italian Banks Rescue

As investors reacted with enthusiasm to confirmation that the Italian government would ride to the rescue of two flailing regional banks, Italy’s banking stocks led European equity markets higher at the start of the week.

However, the liberal interpretation of the European Union’s rules, saying it has destroyed the credibility of the bloc’s banking union has been criticized by detractors of the deal agreed principally between the European Commission, the Italian government and the country’s second-largest lender, Intesa Sanpaolo (which will accept state help to buy the banks’ sound assets).

“With this decision, the European Commission accompanies the Banking Union to its deathbed. The promise that the taxpayer will not stand in to rescue failing banks anymore is broken for good,” bewailed German MEP (member of European Parliament) Markus Ferber in a statement on Sunday.

The critics should pipe up with a better solution if they could see one – which he himself couldn’t, the Italian Economy Minister Pier Carlo Padoan however told reporters on Sunday.

The protection of Spain’s taxpayers contrasted with the protection of some of Italy’s private investors is the principle differences between the two deals – the recent purchase of failing Spanish lender Banco Popular by larger peer Santander and the Italian situation, by observers.

Having ensured that Intesa Sanpaolo’s investors would suffer no worsening of capital ratios and having saved senior bondholders and depositors in the failing Banca Popolare di Vicenza and Veneto Banca, the Italian government could be on the hook for up to €17 billion ($19 billion).

“This is arguably a template of how restructurings should be done”, despite the cries of double standards, said Marco Elser, head portfolio manager at Lonsin Capital.

According to Kian Abouhossein, head of EMEA Banking Research at JPMorgan, the European Central Bank (ECB) actually learnt a lot from the Banco Popular situation in Spain.

“That it is in the interests of involving the government to take on some of the capital hits in order to clean up the system and give up the good assets of a banking system back to the overall private banking system,” he said.

The emphasis placed by the deal’s proponents on the need to safeguard the Venetian economy is overplayed but necessary in this case, argued , Eric Lonergan, fund manager at M&G, even while agreeing that this was a positive development for Italy’s overall banking system which is still weighed down by around 300 billion of bad loans.

“Finally there’s some pragmatism…they have to exaggerate significance to get away with state aid,” he contended. He was referring to protecting senior bondholders and depositors which is the justification being. Most of the bondholders and depositors are from the relatively prosperous north-eastern corner of Italy and are local customers of the failing banks.

“Italy is in the early stages of an economic recovery. They absolutely should not do anything to threaten that, they need to encourage it,” he added.

However, the terms could have been tweaked to allow senior debt investors to have weathered some pain without destabilizing the system even while the outcome is positive overall, according to Lorenzo Codogno, founder & chief economist at LC Macro Advisors.

“A small haircut of senior bondholders would have been acceptable in my view – it would have not undermined financial stability,” Codogno posited to CNBC’s Squawk Box on Monday

(Adapted from CNBC)


Categories: Economy & Finance

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