Italy in talks to secure EU support for banks

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.