Italy began
winding up two failed regional banks on Sunday in a deal that could cost the
state up to 17 billion euros ($19 billion) and will leave the lenders' good
assets in
the hands of the nation's biggest retail bank, Intesa Sanpaolo.
The
government will pay 5.2 billion euros to Intesa, and give it guarantees of up
12 billion euros, so that it will take over the remains of Popolare di Vicenza
and Veneto Banca, which collapsed after years of mismanagement and poor
lending.
Economy
Minister Pier Carlo Padoan said the total funds "mobilized" by the
state would be for up to 17 billion euros - three times more than had initially
been estimated to recapitalize the banks with public money.
The deal,
approved by the European Commission, allows Italy to solve a banking crisis on
its own terms, ensuring the two Veneto lenders are not wound down under
potentially tougher European rules. The cost for taxpayers, however, is hefty.
"Those
who criticize us should say what a better alternative would have been. I can't
see it," Padoan told reporters after the government spent the weekend
drafting an emergency decree to liquidate the two banks.
The decree
effectively means that the Veneto banks' branches and employees will be part of
Intesa Sanpaolo by Monday morning, a move designed to avoid a potential run on
deposits that could have spread chaos across the whole banking industry.
The decree
will have to be voted into law by parliament within 60 days.
Under the
plan, the banks' soured loans, as well as legal risks stemming from a
mis-selling scandal, will be moved to a bad bank, partly financed by the state.
Junior bondholders and shareholders in the two banks will suffer losses, but
senior bonds and depositors will be protected.
Padoan said
that on top of the 5.2 billion euros payment to Intesa, which includes 1.3
billion euros to cover job cuts, the state will offer guarantees to fund
potential losses arising from due diligence of the two banks' soured and risky
loans.
A treasury
source said the government estimated that the total 12 billion euros in
guarantees would translate into a fair-value exposure of just 400 million euros
for the state, but did not explain how it arrived at that figure.
The EU
Commission also said in a statement that the "net costs to the Italian
state will be much lower than the nominal amounts of the measures
provided". It too did not explain.
Banking
analysts, however, said the state could ultimately be on the hook for up to 17
billion euros, even though some value could be salvaged once the soured loans
were fully analyzed, limiting the final bill for taxpayers.
'TOUGH
CONDITIONS'
Intesa
Sanpaolo, Italy's best-capitalized large bank, said last week it was open to
purchasing the rump of the good assets for one euro on condition Italy's
government passed a decree agreeing to shoulder the cost of winding down the
two banks.
Setting
tough conditions for the deal, Intesa CEO Carlo Messina has insisted that his
bank's capital ratios and dividend policy would not be affected by the
transaction.
"Without
Intesa Sanpaolo's offer - the only significant one submitted at the auction
held by the government - the crisis of the two banks would have had a serious
impact on the whole Italian banking system," Messina said in a statement
on Sunday.
The European
Central Bank, which supervises the two lenders based in the country's rich
north-eastern Veneto region, had declared on Friday that they were "failing
or likely to fail", setting in motion the process that led to them being
wound down.
After months
of tense negotiations between Rome and EU regulators, Italy has been allowed to
use national insolvency procedures rather than EU rules designed to prevent the
use of state money to deal with bank crises.
Those EU
rules could have imposed losses on senior bondholders and large depositors, a
politically unpalatable prospect ahead of national elections next year given
that Italian households hold a large chunk of bonds issued by banks.
Some
European officials have voiced exasperation at the way Italy has dealt with a
string of trouble spots in its banking industry, which is weighed down by
nearly 350 billion euros of soured debts -- a third of the euro zone's total.
The
country's fourth-biggest bank, Monte dei Paschi di Siena, is being bailed out
by the state to cover a capital shortfall of 8.8 billion euros. Four other
smaller banks were wound down in 2015.
The future
of the Veneto banks had hung in the balance over the past two years since the
ECB uncovered a capital hole caused by a spike in bad loans and a mis-selling
scandal whereby the banks' customers were sold shares in exchange for loans.
The
dragged-out negotiations between Rome, Frankfurt and Brussels and their outcome
on Sunday have raised serious questions about the effectiveness of banking
supervision and the credibility of Europe's own rules for dealing with bank
crises.
REUTERS
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