Despite new rules, Italy bails out banks

TAXPAYERS ON HOOK

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. 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 EU’s executive Commission, which approved the aid, said that the new system and its rules were followed in all respects.

The European commissioner 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.”

Yet the deal drew criticism, following as it did a similar decision earlier this month to pull the plug on Spain’s Banco Popular. In that case, it was sold for one year to national rival Santander but no taxpayer money was contributed.

“Some in Italy will see this last turn as a happy ending,” wrote Silvia Merler, a scholar affiliated with the Bruegel think-tank in Brussels, in a blog post. “Others will see it for what it actually is: a political choice.”