Despite new rules, Italy pours taxpayer euros into bad banks

Lawmakers say move damages European integration

FRANKFURT, Germany, June 27, (Agencies): After expensive bailouts played a major role in their debt crisis, European authorities agreed on tough new rules to ensure that taxpayers didn’t have to pour money into shaky banks.

So why is the heavily indebted Italian government pumping 5 billion euros ($5.6 billion) into two failed banks that most people outside Italy have never heard of?

It turns out that the new rules — while they may have saved taxpayers some money in this case — have their exceptions. And it shows politicians are still tempted to throw taxpayer money at banks. Functioning banks are crucial because they supply the credit that keeps the economy running. And collapsed banks can wipe out shareholders and bondholders.

But bailing banks out of trouble bankrupted the Irish government, which the other eurozone states had to rescue in 2010, and has seriously burdened others. The new rules stated that bondholders and shareholders had to take losses before taxpayers could be tapped.

Veneto Banca and Banca Popolare di Venezia each have about 1 percent of the Italian banking market for loans, concentrating their business on relatively prosperous northern Italy. Both have been struggling with loans that aren’t being repaid, and have already burned up 3.5 billion euros in new capital invested by a fund backed by other Italian banks.

After financial markets closed Friday, the new European system, in place since 2016, swung into action. The European Central Bank pulled the plug, ruling the two banks were failing or likely to fail. The Single Resolution Board, empowered to impose restructuring or sale of banks in the EU, ruled that there was no public interest reason for it to impose a plan since the banks didn’t threaten the entire financial system. It left the decision with the Italian government — which decided to use public funds.

The functional parts of the banks were sold to a larger competitor, Intesa Sanpaolo, for a symbolic one euro. The shaky parts — such as the bad loans — are being split off into a separate entity that is being wound down. The government kicked in 5.2 billion euros to keep the takeover from weakening Intesa Sanpaolo’s finances, and gave credit guarantees for a further 12 billion euros to finance the parts of the banks that are being liquidated.

Stressed

European officials stressed that the actual costs to the Italian government will be far less than those sums. The government has a claim on whatever can be recovered from the loans and other investments that are being wound down.

Intesa Sanpaolo said that by taking over some of the banks’ business it was helping preserve the savings of 2 million families and the activities of 200,000 client firms.

Markets reacted positively, as investors seemed to welcome the move to clean up Italy’s banking problems. The main stock index in Milan was the strongest riser in Europe, gaining 1.5 percent.

The key step was the decision by the Single Resolution Board to kick the matter back to Italy; a workout by the SRB could have meant losses for all

bondholders.

Doing the insolvency under local Italian law means holders of more secure, or senior, bonds won’t lose money, nor will depositors — even those with funds over the limit. That spares some political backlash. The government of Prime Minister Paolo Gentiloni faces an election by early next year; losses by small investors will only fuel support for the populist and anti-EU Five Star Movement, which polls show rivals the governing Democratic Party in opinion polls.

But the rules did require that holders of less secure junior bonds won’t be paid back, and thousands of small shareholders will lose their already diminished investment. Intesa Sanpaolo

said it was making 60 million euros available to compensate them. Officials at the European Union’s executive Commission, which approved the aid, said that the new system and its rules were followed in all respects.

The European commission in charge of competition policy, Margrethe Vestager, said that “Italy considers that state aid is necessary to avoid an economic disturbance in the Veneto region as a result of the liquidation of BPVI and Veneto Banca, who are exiting the market after a long period of serious financial disturbances.”

Italy’s multi-billion-euro closure of two lenders drew sharp criticism on Monday for hurting a project devised to underpin confidence in the eurozone during the financial crash.

As lawmakers digested details of the rescue, which involves the state rather than investors bearing most of the cost, many criticised Rome for breaking with the spirit of a framework known as banking union — and the European Commission in Brussels for allowing it do so.

Under a deal sealed over the weekend, Italy will pay more than 5 billion euros to Intesa Sanpaolo, its top retail bank, to take the best assets of two failed Veneto banks, with up to 12 billion euros of guarantees to shield Intesa from losses.

That broke a principle agreed by European leaders and enshrined in European Union law that investors, rather than the state, should shoulder the cost

of bank failures.

“It was all for nothing,” said Philippe Lamberts, a Belgian Green party member of the European Parliament who spent months negotiating and writing the law introduced last year.

“This is a bad day for Europe. It’s another hit to European integration,” he said, describing it as a “major blow” to the euro currency itself and damaging for the image of the European Central Bank, which supervises Europe’s biggest lenders. Sven Giegold, an EU parliamentarian who also helped write the law, demanded a parliamentary enquiry into the flouting of the rules, attacking the Commission, the EU’s executive. It had the final say in approving the scheme.