Wolf Richter: Bank Bailout Balloons, Tab for Italian Banking Crisis Soars

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street

Monte dei Paschi di Siena sinks deeper into the mire.

Over the Christmas holidays, when no one was supposed to pay attention, and when the markets were closed, the bailout costs of Monte dei Paschi di Siena, the third largest bank in Italy, and the center of the Italian banking crisis, suddenly jumped by 75% to €8.8 billion ($9.2 billion)!

Just how immense the black hole inside of a bank really is remains unknown until the bank collapses entirely and the pieces are sorted out. No one wants to know, especially not bank regulators. But when banks are teetering, and a bank bailout, or rather a bondholder bailout is being discussed, the aspects of that hole begin to emerge, and the hole keeps getting bigger the longer someone looks at it.

Earlier this year, the ECB’s stress tests of 51 large European banks determined that Monte dei Paschi was the shakiest among them. The ECB gave the bank until the end of 2016 to raise enough capital or contemplate the prospect of being wound down.

Last week, after Monte dei Paschi failed to work out a private-sector rescue deal led by JP Morgan, a taxpayer bailout was moved to the front burner. The bank’s shares and bonds were suspended from trading until the details of the bailout would emerge. This came after two prior capital increases from the private sector in recent years had failed to fill the holes. Each time, gullible investors had gotten crushed.

On Friday, the Italian government decided to shanghai its taxpayers into bailing out the bank’s bondholders with only a small haircut for holders of certain junior bonds. The decree it approved to that effect was based on the assumption that a €5-billion bailout – a “precautionary recapitalization” – would be needed.

A “precautionary recapitalization” is EU lingo for a taxpayer bailout of a bank that is “illiquid” but is still deemed “solvent.” If a bank is no longer “solvent,” it needs to be wound down, under the new EU regulations banning state aid. This would entail much bigger losses for bondholders and possibly some losses for uninsured depositors.

However, a “precautionary recapitalization” would only require that certain junior bondholders take a small first loss before a big capital contribution by the state would bail out the rest, on terms that need to be endorsed by EU state-aid officials in Brussels.

But the tab keeps ballooning.

On Monday, the “second” Christmas holiday in Germany and some other European countries, when markets were closed, and when people weren’t supposed to pay attention, the ECB responded to Monte dei Paschi – which the bank has meanwhile announced after leaks had spread the word – that it would need, not €5 billion but €8.8 billion to fill the hole.

The ECB said that the bank was “solvent” – because no one wants to even contemplate winding down the bank and dealing with the actual black hole. But it warned of the “rapid deterioration” of its liquidity position during the three weeks through December 21, caused by large outflows of deposits – a run on the bank via electronic means, as Italians were trying to haul their savings to higher ground.

Monte dei Paschi is going to deal with the ECB’s reply this way, according to Monte dei Paschi’s statement:

The bank has quickly started talks with the competent authorities to understand the methodologies underlying the ECB’s calculations and introduce the measures for a precautionary recapitalization….

Also on Monday, Jens Weidmann, Bundesbank President and ECB Executive Board Member, warned of a hasty taxpayer bailout, as many questions remain unanswered.

For the measures planned by the Italian government, the bank has to be financially healthy at its core. The money cannot be used to cover losses that are already expected.”

“These [rules on state aid for failing banks] are meant especially to protect taxpayers and put responsibility on investors. State funds are only intended as a last resort, and that is why the bar is set high.

But bank bondholders are sacred and taxpayers are a dime a dozen, and bailouts by central banks are free since they can just “print” the money, though in the end, it all boils down to the simple fact that no bailout is free, that someone always pays for it, as long as it’s not the sacred bondholders.

This banking crisis is not an accident. The toxic loans on the books of the Italian banks are often a result of corruption, political kickbacks, fraud, and abuse. Read… Italy Banking Crisis is Also a Huge Crime Scene

Print Friendly, PDF & Email


  1. peter.j.bolton

    “This banking crisis is not an accident. The toxic loans on the books of the Italian banks are often a result of corruption, political kickbacks, fraud, and abuse”

    For many, many years the incompetent Political and Bureaucratic sewers of Europe have exploited their relationships with the Bankers, for personal gain and agenda, and now it reaches the end. Banks have been coerced into funding various looting scheme for the promise of great favours to follow in return; some times they do[ mostly they don’t forcing the Parties to “double-down”. There are no surprises here at all, and it is the real reason for the EU project, that is to cover the sins of “government” and “bankers”.

    I speak from direct interaction with both these classes. They both knew this would come.

    And, it cannot be contained, so it will all come down, bondholders and all. Real “investment” is heading for China and Russia – the rest are just Muppets, so ? Money has no loyalty except to Profits – so let the guilty hang.

    Who really cares anyway? Nobody will be held accountable as all are complicit. Blame the migrants all you want.

    Tomorrow is another day… The Epoch of Stupid is coming to a Close.

    Ho hum

    1. cnchal

      . . . The Epoch of Stupid is coming to a Close.

      It will continue in one form or another for as long as humans exist. Ever heard of “battlefield nuclear weapons”? Well educated military minds consider it smart, but I digress.

      I say, let capitalism reign. Survival of the fittest, let the weak and old perish. Isn’t Monte dei Paschi di Siena over a century old. It’s had it’s days in the sun, and unfortunately caught a deadly infection of banksters that pushed the scam too far, and now is having a heart attack.

      It really is too bad that the banks are ankle chained to each other like prisoners on a death march, but no one made them do it. The consolation is that when they fall in the giant hole Wolf is talking about, economists can get dragged in with them.

      1. WheresOurTeddy

        “I say, let capitalism reign.” So do I. When the Oligarchy is overthrown, maybe we can try that. I’d hate to think you’re operating under the assumption that the distorted funhouse-mirror “markets” we have now constitute anything approaching actual capitalism.

        Government by organized money is as dangerous as government by organized mob.

  2. peter bolton

    Interesting, I posted a comment sometime back and to this moment, it hasn’t appeared. I wonder Why:

    Is it:
    . that you don’t like the comment?
    . you don’t agree with the comment?
    . you don’t monitor your comments?
    . sounds / appears rather weird.

    Never mind.

    1. Yves Smith

      Please read our Policies. You posted your comment at 3:00 AM. You then got upset that we had not liberated it…less than 2 hours later, in the middle of the night, on a holiday week.

      We are not the MSM. We have barely any resources and our priority is getting new posts out, not managing the comment queue. We commit to getting to comments within 24 hours.

      If you would like us to free them up faster, the Tip Jar is to your right. We need more staffing (a LOT more staffing) to meet your demands.

  3. washunate

    …a taxpayer bailout was moved to the front burner…

    I love the passive voice in our contemporary world of financial fraud and war crimes. It’s like Area Man in the Onion.

    1. Yves Smith

      In fairness to Wolf, the responsibility is diffuse. Renzi had been trying for months to get the Eurocrats to let him use state funds to save (some of) the banks, with no success.

      1. feox

        Hi Ms Smith,

        Do you think it’s a good thing that the new European Bail-in rules are trying to protect the public by preventing taxpayers assuming 100% of the costs? There seems to be some kind of confusion where people are criticizing bailout and bailing at the same time.

      2. lou strong

        Renzi went on struggling with Eurocrats about zero point something of the national budget , but he didn’t really push for a state bailout for MPS , in the meanwhile promoting an impossible privately -funded bailout instead, because during the long political campaign about the constitutional referendum a state bailout would have appeared bad for his chances.

    1. craazyman

      and off the books.

      I can see “The Amore” — the new Italian currency — coming soon. The Italians have better things to do than work like Germans. LOL, The Amore and the Euro can have an Italian relationship. When we print to the sky let the German’s all Cry “That’s Amore!” / Let them try to say Nein when they’re drinking our wine, that’s Amore! / Hans will sing bling a bling bling bling a bling bling and we’ll say “What a fella!” / Our Debts we’ll pay every day, every every day to Jens and Angela! / When you’re livin your dreams and you know you’re not schemin Signore! / In at 10 out by 4 open up that cafe door, That’s Amore!

      This is what I like about Wolf “The Asteroid King” Richter: He keeps it short, to the point and clear. He gets in, says his thing and then gets out. Bravo! It should be a form of instruction to internet writers of all ages, shapes, sizes and persuasions.

      No long-winded Politburo speeches! If you make it long, at least don’t repeat yourself and learn how to write for God’s sake.

      1. Jim Haygood

        Wolf’s post doesn’t mention that MPS’s deposit base has dropped 11 percent since mid-2016, according to a chart published in the FT.

        That’s bad, when you’re geared 20 to 1, 50 to 1, or even infinitely (if equity has actually gone negative, as one might suspect). The Z site is sarcastically calling it a “bank jog.”

        After all is said and done
        Gotta move while it’s still fun
        Let me walk before they make me run

        — Rolling Stones

      2. Katharine

        Amen! As one of my instructors said regarding fifteen-minute talks, “Tell them what you’re going to tell them, tell them, and tell them what you’ve told them.” The same formula can be applied to many other communications. People are coming to your piece from some other mental place and need to know first off what it’s about. Then they need to know what information you have to offer, and what arguments, and finally what conclusions you draw–and damn! it was about what you said it was, and you had something to say.

  4. BecauseTradition

    Live by the banks, die by the banks? I’m reminded of the monkey with his hand stuck in a cookie jar – all he has to do to escape is let go of the cookie.

    There’s no need at all that depository institutions (aka “banks”) hold the economy hostage since monetarily sovereign governments (or the ECB in the case of the Eurozone) can provide inherently risk-free accounts and transaction services in fiat to all citizens that completely bypass the banks.

    But then how could the poor be forced to lend to banks to lower the borrowing costs of the rich? A long standing though odious tradition?

Comments are closed.