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It has only postponed some of the hardest choices. The detail of this rescue is still unclear and negotiations with Brussels are only just beginning. Their outcome will be critical, not just for Italy’s financial system, but the future of Europe’s banking union.
In essence MPS is a make-or-break test-run of Europe’s new rule book for handling bank crises, principally designed to shield taxpayers from bailout costs.
Italy’s planned intervention uses a legal loophole that allows for “precautionary recapitalisation”, topping up capital buffers at solvent banks in certain circumstances. How it operates will set a big precedent.
The remaining regulatory hurdle is Margrethe Vestager and the state aid police at DG Comp, who must approve the intervention. Berlin is watching very closely. If it effectively short-circuits EU rules and blows apart the principle that creditors pay for expected losses at a bank, whatever appetite Germany has for further eurozone financial integration will evaporate.
So what is left to agree? Most of the key elements. We know the European Central Bank thinks MPS is solvent, and therefore eligible for a precautionary recap. And we know how much extra capital it thinks the bank needs to cope with the adverse scenario of its stress test (a figure that magically increased from around €5bn to €8.8bn).
But that is just one factor in the rescue. We do not know how big the permitted Italian capital injection will actually be (it does not need to be the full adverse scenario). We do not know what losses will be forced on private creditors, the details and legality of compensation available for retail investors who take a hit, or how deep the MPS restructuring will be, in terms of asset sales and branch closures.
All these depend on a final assessment of whether MPS will have enough private funds to handle expected losses from their baseline forecast for the economy – the key condition for any precautionary recap.
Smuggling in public money to cover bad loans would smash a hole through Europe’s bank resolution reforms. Some in Brussels know this. Yet if they press hard, Rome will cry foul and say it is politically impossible to spread the pain of losses beyond junior bondholders.
There is a lot to sort out, and nothing is ever easy when it comes to Italian banks. The next few weeks will determine whether that €20bn Christmas fund is a gift Italian banks will find rather difficult to unwrap.
Full article on Financial Times (subscription required)