21 July 2016

Financial Times: Draghi backs public bailout of Italy’s ailing banks

ECB's 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.

The remarks by the president of the European Central Bank, at his monthly press conference, helped alleviate concerns about Italian lenders, which have been weighed down by a heavy burden of bad debt and non-performing loans and whose shares have been depressed after the British referendum stoked fears about EU cohesion.

But Mr Draghi also argued that it was too early for the ECB to give its full response to the Brexit vote.

European bank stocks, led by Italian lenders, rallied after he described a state backstop as a “very useful” way to help banks rid their books of non-performing loans — a problem the ECB president said was making his central bank’s policies less effective.

“We want to avoid fire sales,” he said, referring to the banks’ forced sale of assets at too cheap a price because of a lack of a functioning market. He added that there was room within existing EU rules to provide state support.

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.

Tougher rules on government bailouts have put pressure on Rome to impose rescue costs on private investors in the banks, but such a move — which could hit small investors — might expose Mr Renzi to political pressure ahead of a crucial referendum on constitutional reform in October. The ECB would like to see a deal reached before new European bank stress test results are published on July 29.

“It’s quite clear in Draghi’s mind Italian banks matter more than Brexit right now,” said Gilles Moec, European economist for Bank of America Merrill Lynch. [...]

The governing council kept its benchmark main refinancing rate at zero and the deposit rate at minus 0.4 per cent. The rate freezes were widely expected, but analysts had hoped for more clues from Mr Draghi on how the ECB could respond later in the year to the economic fallout from Brexit.

Instead, the ECB president told markets they would have to wait until the next policy vote in September, when new inflation and growth projections would shape the bank’s response.

Mr Draghi praised financial markets, which had weathered the rise in uncertainty and volatility that had followed the UK’s vote to come out of the EU “with encouraging resilience”. But he added that risks to growth “remain tilted to the downside”. Most analysts expect downgrades in September — and more action from the governing council to follow.

The ECB president also said sharp drops in share prices for Italian and other European stocks in the aftermath of the Brexit vote were a concern — lower equity valuations made capital more expensive, and that would rein in lending.

Mr Draghi said little to address fears that the ECB could run out of bonds to purchase as part of its landmark quantitative easing programme, which involves buying €80bn of mostly government debt a month until at least March 2017. [...]

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