“TIT BOILED which were to explode have exploded, ”explains Mario Deaglio, economist at the University of Turin, of Italian banks. The latest carbuncle to reach its peak is the Banca Carige, which has been put under provisional administration by the European Central Bank (BCE) on January 2, the first time that the euro zone regulator has exercised this power. This decision follows a shareholders’ meeting in December which did not approve the first tranche of a capital increase of 400 million euros (455 million dollars).
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The BCE appointed three directors, including the former chief executive and chairman of Carige, giving them three months to reduce the € 3 billion stock of bad debt and organize a merger. The Italian government has issued a decree to guarantee the bank’s bonds up to 3 billion euros and to support a pre-emptive recapitalization, if necessary. On January 18, Banca Carige announced that it would issue state guaranteed bonds to the tune of € 2 billion, and possibly € 1 billion more. But he maintains that he will find a market solution. The directors will present a business plan next month.
Banca Carige, Italy’s tenth largest lender, has had a rough time recently: an accounting scandal erupted in 2017 and has crossed three bosses in as many years. His last troubles date back to last fall, when the BCE identified losses of € 200 million. Carige was to consolidate its capital or organize a merger by the end of the year. Attempts to issue bonds on the market failed, and in November the Italian interbank deposit guarantee fund, a voluntary program, intervened to the tune of 320 million euros. The capital increase planned for December included the conversion of these bonds into shares.
The bailout legislation is very similar to that passed by the previous government in 2017 to rescue another troubled bank, Monte dei Paschi di Siena, Italy’s fourth. But their situations differ significantly. Monte dei Paschi required a capital injection of 8 billion euros; Carige’s shortfall is 400 million euros, of which 320 million euros already.
This is a welcome sign of stabilization, says Nicolas Véron de Bruegel, a think tank in Brussels: “Three years ago, Italy was a textbook case of a zombie banking system. Total bad debts, including those in arrears and those classified as unlikely to be repaid, rose from a peak of 341 billion euros in 2015 to 211 billion euros last September. Assignments of bad debts (NPL(s) last year amounted to EUR 66 billion; Bank IF IT’S, a lender that is building up a portfolio of bad debts, forecasts a turnover of 50 billion euros in 2019. A report by PwVS, a professional services firm, suggests this year could see the start of a market for low-repayment loans and the growth of the secondary market for loans. NPLs.
Monte dei Paschi di Siena, for its part, issued on January 23 a bond loan of 1 billion euros at five years, guaranteed by residential mortgages. Demand has exceeded 2 billion euros. Last year, it sold bad loans with a face value of 24.1 billion euros, but market volatility made its recovery trickier than had been hoped. This year, it will have to present a reprivatization plan to the BCE. It is expected to be sold by 2021.
Italian banks are still fragile. The bad debt stock remains high, profitability is low and banks remain heavily exposed to sovereign debt even as national policy has become more tumultuous. There are more challenges ahead, says Giovanni Razzoli from Equita, a bank. In Italy, a recession is looming, which means the appetite for mergers is likely to be low. The BCEtargeted longer-term refinancing operations, which provided cheap credit to euro area banks, are expected to end. And he wants banks to get rid of all bad loans by around 2025, sooner than expected. The scars of the banking crisis will be slow to fade.
This article appeared in the Finance and Economics section of the print edition under the title “Stubborn Imperfections”
