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.