The Eurocrats who were insisting on using their bright shiny bail-in toy are now meeting some real oppositon. On the one hand, it seems inconceivable that the Europeans would let the Italian banks go under, since Deutsche Bank would be next in line, plus bail-ins would greatly strengthen the hand of the Five Star Movement, which has said it will have a referendum on leaving the Eurozone if it were to come into power. However, bail-ins would also put even more attention, not just in Italy and abroad, on the fact that small savers were snookered into buying bonds that put them close to the front of the line as bail-in cannon fodder. These retail customers were told, as happened in Spain, that these instruments were just like deposits. Italian sources believe this abuse started when Draghi was the head of the Bank of Italy, so the blowback could implicate him.
Italy have been left to twist in the breeze despite the idiocy of the bail-in rules (we’ve always said that bail-ins can be a good implement in a regulator’s toolbox, but the new Eurzone “one size fits all” framework is widely considered to be disastrously unworkable even by bank critics). Its prime minister Matteo Renzi has specifically argued for the “exceptional circumstances” exception shortly after Brexit, and had been rebuffed, and had tried for another loophole, public interest (meaning presumably the expected shellacking of hapless small savers) and was told “no” on that too. So it is a significant development that Draghi is now backing Renzi, but as we’ll see below, he is not calling the shots.
Mario Draghi backed a public bailout of Italy’s troubled banks “in exceptional circumstances”, even as he hailed the eurozone for its resilience in the aftermath of Britain’s decision to quit the EU and left interest rates on hold…
To date, however, EU officials and Italian prime minister Matteo Renzi have failed to reach a deal on state help for the country’s lenders — notably for Monte dei Paschi di Siena, the country’s third-largest bank.
“Reach a deal” is an odd way of putting it. Renzi wants a good bank/bad bank solution, and to have a waiver from new banking rules to allow him to use state funding as part of the program. The Eurocrats are insisting on a narrow interpretation of the rules, which means bail-ins
However, the pink paper curiously was not explicit about Draghi’s authority, or more accurately, lack thereof. From Bloomberg:
European Central Bank President Mario Draghi supported a public backstop for non-performing loans, becoming the most powerful euro-area official yet to make a stand on a key issue faced by Italian banks.
Non-performing loans are an obstacle to effective monetary policy and a public backstop would be a “very useful” way of addressing them, Draghi said in response to questions at the ECB’s news conference in Frankfurt Thursday. “Non-performing loans are a big problem for Italian lenders that will take time to resolve,” he said.
While Draghi acknowledged that a decision on how to treat Italy’s NPLs is beyond his remit, his comments reflect concern that the ECB’s unprecedented monetary easing could be stymied by dysfunctional banks. Earlier this month Bank of Italy Governor Ignazio Visco said state intervention to support Italian banks may be needed because of the risk that current difficulties could undermine trust in the nation’s financial industry.
So this drama is still in play. Stay tuned.
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they should outlaw crime because it gets in the way of effective monetary policy
surprising nobody thought of that already, it seems so obvious
It’s either the Big Bailout or it’s The Amore!
When we print to the sky
Let the Germans all cry
That’s Amore
Let them try to say “Nein”
when they’re drinking our wine
That’s Amore
Franz will sing bling a bling bling, bliing a bling
And we’ll say what a fella
Debts we’ll pay every every day every every day
To Hanz and Angela
if gold bars make you drool joost-a like a pasta fazool
that’s No More eh
we’ll a dance down the street money under our feet, stars above
when your living your dreams but you know you’re not schemin’, Signore
scusa me, but you see, backed by the ECB that’s Amore!
And a bail in for grandma
Her liquidity preference – no mor aaaaa
But she can vote her proxy
Showin’ her moxy
And terrorize bankers some mor aaaaa
Stop it, you’re making me laugh!
I saw three Banks come bailing in
On Christmas day, on Christmas day;
I saw three Banks come bailing in
On Christmas day in the morning.
And what was with those Banks all three,
On Christmas day, on Christmas day?
And what was with those Banks all three,
On Christmas day in the morning?
Our Savior Mario and His lady,
On Christmas day, on Christmas day;
Our Savior Mario and His lady,
On Christmas day in the morning.
Pray whither bailed those Banks all three,
On Christmas day, on Christmas day?
Pray whither ailed those Banks all three,
On Christmas day in the morning?
O they sailed into Bankruptcy,
On Christmas day, on Christmas day,
O they sailed into Bankruptcy,
On Christmas day in the morning.
And all the bells on stocks shall ring,
On Christmas day, on Christmas day;
And all the bells on stocks shall ring,
On Christmas day in the morning.
And all the Merkels in Berlin shall sing,
On Christmas day, on Christmas day;
And all the Merkels in Berlin shall sing,
On Christmas day in the morning.
And all the EUs work shall sing,
On Christmas day, on Christmas day;
And all the EUs work shall sing,
On Christmas day in the morning.
Then let us all bail in again,
On Christmas day, on Christmas day;
Then let us bail in again,
On Christmas day in the morning.
Hahaha!!
Poetry for bail-ins and bail-outs.
A question for Yves: Italy already has a high debt/gdp ratio and the bail-out would definitely increase it. I guess that Draghi’s support is important for Italy to avoid bond spreads go to heaven. This would rise the question of why some countries deserve different treatments, and more precisely Italy when the head of the ECB is italian. (I personally favour Renzi’s solution but this will arguably raise questions)
Outrage migth come not from Germany but from Portugal or Spain. This autumn, when a weak government is finally formed in Spain, they will confront with fresh austerity calls from the eurocrats. Note that the eurocrats turned a blind eye to Spain during an electoral year (18 monthts because of election repetition) , obviously to favour their pet conservative party, but now they will order to resume with austerity measures.
I am sort of surprised that Spain isn’t already having some type of slow motion bank runs.
hi Yves, what are the repercussions likely to be? what would the ideal resolution be, an ECB bailout with a breakup of the banks into good and bad and administration of both?
the way i see the options is, a) the bail in – catastrophic for the country as it ruins the suckers who bought the bonds and any depositors with a lot of cash in the bank. even though M5S recently said they would be against an ex.it, a bail in would certainly provide a huge boost to secessionism in italy and, in particular, the lega nord.
b) a bail out, but that is problematic, too. if an exception to the bail-in rule is made for italy, other countries will feel entitled to one, too, cyprus will feel particularly slighted as they had to go through with a bail in. such special treatment will boost leavers in other countries, also adding pressure to the union. furthermore, is there any way to decouple a bail out from austerity with EU rules as they are? austerity would do even more damage to italy than a bail-in would only different people would suffer, those with the least means already.
i think renzi’s proposal of breaking up the banks may not be enough to quell public anger. people have had enough of paying for bankers’ lavish lifestyles so breaking up the banks but leaving everything else be would also sow seeds of destruction.
Not to fear, Draghi could run his hand under an Italian mattress and steal their nest egg without fear.
We saw this in America following the 2008 crash. Bankers stole billions (maybe trillions) from hapless home owners. For their “Patriotism” the bankers received vulgar bonuses, trillions in free money to play with (QE), securitized the stolen homes, drove urban rental rates out of the universe and smiled all the way to their bank…..with a get out of jail free card. There was barely a peep from the fleeced sheep and they are now lining up to vote for the establishment that brought on the misery! Good luck my European Friends with bail-ins. Who ever thought up this scam should be shot for crimes against humanity.
One might ask, who was the knucklehead running the regulator, the Bank of Italy, when the Italian banks were touting their equity products as safe deposits to mom and pop investors? Well Mario Draghi, of course ! Move along…..
Regulatory capture is universal!
Bankers look after their own.
Bankers blew up the world.
The financial sector was de-regulated, allowed to create almost un-limited credit and not forced into productive lending. They did what they like doing best and blew up asset bubbles in real estate.
The Central Bankers used low interest rates to help this process on its way. It did encourage borrowing but into unproductive real estate lending.
Both the US and Germany were badly affected by the dot.com bust and the ECB and FED lowered interest rates to help. This blew housing bubbles in the US, Ireland, Greece, Spain and Holland.
The US leveraged its housing bubble up with derivatives for global devastation.
Holland has managed to keep its housing bubble inflated for the moment.
After 2008, more of the same from the Central Banks and Australia, Canada, Sweden and Hong Kong look as though they will be next to go through their “Minsky Moments”.
Japan went through its “Minsky Moment” in 1989 and has had twenty five years to learn about the balance sheet recessions that follow:
What works: Fiscal policy
What does nothing: Monetary policy
What make things worse: austerity
Japan was just recovering from 1989, when 2008 blew up the world.
Current Economy Minister Vittorio Grilli avoided mentioning Draghi directly but stressed that it was not the government but the central bank that was responsible for bank supervision. “It wasn’t us that did the controlling,” he told reporters. “On the checks, all I will say is that it is the responsibility of the Bank of Italy.”