One of the recurrent features of the European kick the can down the road approach to systemic risks like wobbly banks ands sovereigns is that the confidence building measures are quickly recognized as band-aids over gunshot wounds, or even gangrene, and Mr. Market goes back to having fits.
Last Friday, after EU banking authorities revealed the expected, that Italy’s number three bank, Monte dei Paschi, needed yet another rescue, the press reported on a solution. But even with the Financial Times reporting some of the nitty-gritty details, the comments confirmed that there were enough gaps that the FT account had some important gaps.
I’d love readers to correct or add to this 50,000 foot level recap, based on the FT and reader input from the German press:
€50 billion face value of dud loans are transferred to an SPV and severely haircut (I believe to 33-34%)
On the liability side is 3 tranches:
• A senior tranche with a government guarantee, sold to third party investors
* Atlante, the quasi public backstop fund, takes the €3 billion junior bond tranche
• The equity tranche goes to current equity investors (not clear how this is funded without it being a variant of a rights offering…..or this may just be muddied reporting from Germany).
While it would be nice to get crisper details, here’s the key bit, from a FT story last week:
Senior bankers expect the recapitalisation to take place in the fourth quarter…
The proposal is being presented as “the last bailout” for Monte dei Paschi, with the expectation that, if the lender cleans up its bad loans, it will become a takeover target. Still, senior bankers admit it is highly risky and will prove a tough sell to drum up support for the recapitalisation with the bank’s past history of burning investors. Bankers do not rule out that, if the recapitalisation fails to find enough buyers, Monte dei Paschi may be forced to swap some of its debt for equity.
My understanding is “fourth quarter” means after Italy’s referendum, with the ECB’s new bank liquidity facility tiding over the doddering bank until then if support is needed.
What might that mean? Most underwritings have some form of “extraordinary event” out. Given how difficult this deal is expected to be, I’d expect this clause to be at as permissive as they get in European deals.
So the question is: Would a failed referendum be enough for the underwriters to invoke this clause? If so, that means this deal is even more cynical than the usual Eurocrats’ special.
Whatever the cause, investors are now in a funk about European banks in general and Italian banks in particular. From a Financial Times report today:
The Euro Stoxx Banks Index, a broad measure of the continent’s lenders, dropped 3.2 per cent in early trading on Tuesday following a 2.8 per cent decline on Monday…
Appetite for bank shares was eroded further on Tuesday by a blitz of news, including a disappointing set of results from Commerzbank, Germany’s second-largest bank, which reported a 32 per cent drop in quarterly profits. Commerzbank shares fell 8.2 per cent to a record low of €5.28…
Although banks’ share prices have retreated across Europe, Italy has been a simmering flashpoint because of anxiety over whether they will need fresh capital to compensate for their non-performing loans.
Italian bank shares were sharply lower for a second day as investors speculated that lenders may need to write down the value of the loans on the same scale required by a rescue of Monte dei Paschi, Italy’s most troubled bank.
The shares of UniCredit, Italy’s largest lender by assets, were temporarily suspended after dropping 5 per cent following an almost 10 per cent plunge on Monday. Banca Popolare weakened 3.4 per cent, while UBI Banca fell 4.7 per cent.
Investors pointed to the details of Monte dei Paschi’s plan to sell non-performing loans, suggesting that if a similar pricing approach were used for other Italian banks it would force them to raise more capital.
Another story, The vanishing market value of European banks: charts, showed the impressive decay this year in the prices of Commerzbank, Unicredit, Barclays, Credit Suisse, and DeutscheBank share prices.
European bank stocks are heading for their worst one-day loss since the prolific falls suffered during the two days after the Brexit referendum, and beyond that, since the bumpy ride seen in February.
Northern Italian lender Banca Popolare dell’Emilia Romagna has sold off hard over the last hour, snatching the biggest faller title from Banca Monte dei Paschi.
Bper shares are now down 10.3 per cent today, its fourth worse one-day loss since the depths of the eurozone crisis.
European bank shares have come under intensifying pressure today as markets continue to digest the outcome of the European bank stress tests, the Monte dei Paschi rescue deal unveiled on Friday, the impact of negative rates on earnings and some shaky earnings from Commerzbank this morning.
Shares in Monte dei Paschi have skidded 10.2 per cent and are down 17 per cent from the high they hit on Friday after a long awaited rescue deal was finally agreed.
Commerzbank shares are plumbing new record lows, down 8.9 per cent this afternoon.
Shares in every large listed European bank are in the red, and the Stoxx 600 banks index has skidded 4.4 per cent, its third deepest one-day drop of the last six months.
Investors are going to keep hammering banks, pressing EU authorities to relent and let the Italian government fund bailouts, as prime minister Matteo Renzi has sought from the beginning of the year. One colleague argued that if Deutsche Bank’s share price dropped below €10 a share, that would alarm officials so as to induce them to take more aggressive measures. The price is now €11.27, just a tad above the 52 week low of €11.22. The grim tone of the reports today does not lead one to expect a big bounce in the next few days, although there could be a weak relief rally. In other words, this drama is very much in play, and not in a good way.