Italy in talks to se­cure EU sup­port for banks

The Pak Banker - - COMPANIES/BOSS -

The Ital­ian govern­ment is en­gaged in last ditch talks with the Euro­pean Union in an at­tempt to se­cure a long-de­layed deal on a sup­port scheme for its banks as the coun­try's fi­nan­cial in­sti­tu­tions take a daily bat­ter­ing from the mar­kets.

As the EU Com­mis­sion calls for Italy to sup­ply more de­tails of its plans in or­der to flesh out an out­line sent last week, Ital­ian of­fi­cials are call­ing for an ur­gent con­clu­sion to talks that have al­ready dragged for two years. One se­nior Ital­ian of­fi­cial fa­mil­iar with the ne­go­ti­a­tions told the FT that a deal on the so-called "bad bank" plan, which in­volves guar­an­tee­ing hun­dreds of bil­lions of euros of bad loans weigh­ing down banks' bal­ance sheets, must be con­cluded in the com­ing days or weeks oth­er­wise the whole ini­tia­tive will col­lapse.

But the of­fi­cial also cau­tioned that even if ap­proved, the scheme won't be a panacea for the prob­lems af­flict­ing the banks be­cause Italy will have had to limit the im­pact of the scheme sig­nif­i­cantly to com­ply with EU state aid rules.

Brus­sels has been on the end of sus­tained crit­i­cism by Italy for tak­ing too long and at­tach­ing too many con­di­tions to steps the coun­try is seek­ing to take to fix its banks, mak­ing it a pri­mary source of ten­sion be­tween Rome and the EU in re­cent months.

An­to­nio Pat­uelli, the pres­i­dent of the As­so­ci­a­tion of Ital­ian banks, cited the lengthy ne­go­ti­a­tions on the sup­port scheme as "the ba­sis, among other fac­tors, for the un­cer­tainty of the mar­kets" in Il Sole 24 Ore, the Ital­ian news­pa­per. Un­der re­quire­ments from Brus­sels, usu­ally cred­i­tors at a fail­ing bank must take losses be­fore any kind of state sup­port can be pro­vided to the fi­nan­cial in­sti­tu­tion

Cru­cially, those rules got tougher on Jan­uary 1 when new leg­is­la­tion kicked in re­quir­ing 8 per cent of a bank's li­a­bil­i­ties to be wiped out be­fore pub­lic money can be used.

The Euro­pean Com­mis­sion is seek­ing more de­tails on pro­pos­als sub­mit­ted by the Ital­ians last week, ac­cord­ing to an EU of­fi­cial, as in­for­ma­tion re­ceived so far is not enough to de­ter­mine if the scheme would count as state-aid or not. While pre­vi­ous dis­cus­sions had fo­cused on the set­ting up of a sec­tor-wide bad bank, Italy has now shifted to propos­ing a lighter-touch guar­an­tee sys­tem in a bid to avoid it be­ing des­ig­nated by the com­mis­sion as state-aid.

The Ital­ian plan cen­tres on guar­an­tee­ing non - per­form­ing loans on what Italy says is a mar­ket com­pet­i­tive ba­sis, in a bid to en­cour­age pri­vate in­vestors to buy it.

Ac­cord­ing to a per­son in­volved in the talks, the cur­rent plan is much more re­al­is­tic than the bad bank model that was pre­vi­ously be­ing pur­sued by Italy, and so marked a step for­ward in the talks. Mar­grethe Vestager, the EU's com­pe­ti­tion pol­icy chief, told re­porters on Wed­nes­day that her ser­vices were "in a very con­struc­tive di­a­logue with the Ital­ian au­thor­i­ties."

The plunge in Ital­ian bank­ing shares - par­tic­u­larly the most vul­ner­a­ble ones, in­clud­ing those of Monte dei Paschi di Siena - has put heavy pres­sure on Mat­teo Renzi's govern­ment to ex­plain the rout and come up with so­lu­tions.

On Wed­nes­day, he was forced to con­vene a meet­ing with Pier Carlo Padoan, the fi­nance min­is­ter, and Ig­nazio Visco, the gov­er­nor of the Bank of Italy, to dis­cuss the trou­bles in the bank­ing sec­tor.

Ital­ian of­fi­cials have re­peat­edly sought to re­as­sure in­vestors and the pub­lic that its bank­ing sec­tor re­mains sound and it has been the sub­ject of a spec­u­la­tive at­tack that is not based on fi­nan­cial fun­da­men­tals. They have also said that no "ex­tra­or­di­nary mea­sures", such as govern­ment in­ter­ven­tion, are be­ing con­sid­ered. How­ever, the sit­u­a­tion is be­ing mon­i­tored closely, one of­fi­cial said.

"This con­sti­tutes a sig­nif­i­cant political emer­gency for prime min­is­ter Renzi as it could put at risk the govern­ment's cred­i­bil­ity," Wol­fango Pic­coli, an an­a­lyst at Te­neo In­tel­li­gence in Lon­don, wrote in a note.

"The rout comes shortly af­ter the bail-in of four small banks that trig­gered a still on­go­ing political back­lash and it may af­fect cit­i­zens' con­fi­dence in the sta­bil­ity of the bank­ing sec­tor (and, there­fore, in the coun­try's nascent eco­nomic re­cov­ery) as well as Renzi's and his eco­nomic team's stand­ing," he added.

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