Saturday, 18 August 2018

Venetian farce throws consistency to the wind

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Keith Mullin bemoans the bailout of two Italian banks that were as systemically perilous as a dead hamster

THE EUROPEAN UNION is doing itself no favours. It’s not just that its rationales and applied methodologies for dealing with vulnerable and fragile banks seem inconsistent and rather opaque.

It’s that governments (read: Italy) constantly use wavering inconsistency and latitude to game the rules. By uttering control words like “mis-selling”, “contagion” or “threat to economic growth”, they can magic away interference from Brussels to protect broad national interest (read: narrow political self-interest). And by invoking threats to business continuity and using hordes of vulnerable retail shareholders and creditors as human shields, they can maintain control of the madhouse. Especially crucial ahead of that other control word: “elections”.

What rules are applied to which situations? What defines which route is taken, or how terms - like “systemic” or “public interest” - are defined? How is “point of non-viability” delineated, who gets bailed in or bailed out or benefits from post-hoc restitution? How is state aid invoked and what factors determine whether issues are dealt with by national resolution authorities or EU-level bodies? … It’s all unclear, suffers from seemingly inconsistent or contradictory application or just seems arbitrary.

The differentiated approaches to dealing with Banco Popular in Spain (SRB/no state support/sub debt wipe-out), and Veneto Banca, Banco Popolare di Vicenza and Banca Monte dei Paschi di Siena in Italy (NRA/managed state-sponsored liquidation/retail sub debt restitution for the first two; NRA/state bail-out/full or partial sub debt restitution for BMPS) make a mockery of the notion of a level playing field.

BUT BEYOND ISSUES of inconsistency, we have yet another example of hefty taxpayer support for failing banks and a government running rings around state subsidy rules.

A matter of weeks after Popular shareholders and subordinated creditors were burned at the stake, we get Italian taxpayers putting up almost €17bn (including up to €12bn in guarantees) to oil the wheels of Intesa Sanpaolo’s deal-of-the-century €1 acquisition of cherry-picked assets of Veneto Banca and BPVi. While senior bondholders get off scot-free and retail subordinated bondholders receive full restitution.

In what the EC described as an “open, fair and transparent sales procedure” (hmmm …), Intesa wrote its own terms that included more riders, puts and protective contingencies than you can shake a stick at to get all of the good bits but not the colossal pile of crap on the banks’ balance sheets.

What’s staggering is how easily the European Commission has bought the Italian government’s tortured semantics. Boy, did they turn on the theatrics.

Let’s be clear: Veneto and BPVi were as systemically perilous as a dead hamster. Yet Intesa CEO Carlo Messina said without his bank’s offer the crisis at the two banks would have had a serious impact on the whole Italian banking system. They had a 2.5% market share of loans and a 2% share of banking sector deposits, for God’s sake. And that was before the 44% decline in deposits between June 2015 and March 2017 blithely watched over by EU officials.

Intesa said its takeover avoided “serious social consequences” that would have derived from compulsory administrative liquidation proceedings. Like what? Aged proletarian bondholders looting, burning and seizing the means of production in an armed uprising? Ludicrous.

Writing in Il Foglio, in a piece entitled “State aid is the best way to rescue Veneto banks”, Economy Minister Pier Carlo Padoan really hammed it up: “a simple liquidation”, he said, “would have triggered a huge crisis for a territory that is pushing Italy into economic recovery, so state aid made [it] possible for Intesa to save thousands of jobs, guarantee credit continuity for businesses and artisans, and avoid disadvantages to households and savers … We didn’t save two banks that couldn’t stand on their own two feet; we saved workers, savers and businesses. We saved the economy of the territory”. Give the man an Oscar.

When the deal was concluded, he told reporters: “those who criticise us should say what a better alternative would have been. I can’t see it”. Call me an anarchist, but how about following the spirit of the damn rules?

FOR ALL OF their supposed criticality, on the day the ECB said the banks were failing or likely to fail, they failed the SRB resolution test for lack of public interest: the functions the banks performed were not critical, could be replaced in an acceptable manner and within a reasonable timeframe; would result neither in significant adverse effects on financial stability nor distort competition.

That’s a somewhat different story. Yet the EC still granted state aid approval on June 25 on the basis that (as per Competition Commissioner Margrethe Vestager) “Italy considers that state aid is necessary to avoid an economic disturbance in the Veneto region”.

So there you have it. As clear as mud. If they’re not careful, such double-talk could render much of the region’s banking sector off-limits and un-investible. If you can never be 100% sure about what will happen in a crisis, why put money in, outside of a well-defined group of national champions, which (I don’t care what the small print says) will always benefit from some sort of government support in a crisis?


Keith Mullin is founder of KM Capital Markets. He has spent more than 25 years covering capital markets. Keith was editor-at-large of IFR until early 2017 and editor of IFR magazine 1996–2007.

The subject of this column will form a basis for discussion at IFR’s autumn Bank Capital Conference, which Keith will be moderating. Last year, the event hit over-capacity so book your place early. Check for details.

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