Italy’s referendum result plays havoc with its shaky old banks

The bail-out effort to save Banca Monte dei Paschi di Siena is in jeopardy after the resignation of Italian prime minister Matteo Renzi following his defeat in Sunday's referendum on constitutional reform.

For more than a year, bankers and officials have been working on a bail-out plan for Monte dei Paschi, involving a €5 billion recapitalisation. Alessia Pierdomenico / Bloomberg

Outside Italy, not many people had heard of Banca Monte dei Paschi di Siena until this past weekend. Founded in 1472, it claims to be the world’s “oldest surviving bank”, yet right now it faces the prospect of not surviving for the week. The resignation of Matteo Renzi, Italy’s reformist prime minister, after decisively losing a referendum on constitutional reform, has left it poised on the edge of collapse, with all that implies for the rest of the country’s shaky banks. And for the rest of the world’s almost equally shaky financial system.

For more than a year bankers and officials have been working on a bailout plan for Monte dei Paschi, involving a €5 billion (Dh19.55bn) recapitalisation and on Monday its advisers, JP Morgan and Mediobanca, were in desperate meetings to pull it out of the fire.

But if the other banks and financial institutions that had agreed to underwrite the issue walk away, the Italian state is expected to nationalise the bank.

If that happens, the Italian banking crisis, which pundits have been forecasting for years, will be on us in full force. And, in the way these things do, it won’t be long before it spreads across Europe and on into the UK and even the US.

The most frequently used word yesterday was “contagion” – banking crises these days spread faster than Asian flu.

Despite a great deal of fixing since the sub-prime crisis, there are still vulnerable banks all around the world. Only a few weeks ago Deutsche Bank, Germany’s largest lender, caused some alarm and RBS, which is 84 per cent owned by the British government, failed the Bank of England stress tests on its capital base.

The situation in Italy of course is more immediate: UniCredit, the country’s biggest bank, was expected to announce a €13bn capital raising next week as part of a new business plan. Bankers yesterday reckoned it would still get that away but other banks, including Genoa’s Carige, Popolare di Vicenza and Veneto Banca, will struggle to get the €3bn in new capital they are after.

There are at least another four banks in the queue and investors are not going to rush to the rescue just yet.

On the face of it, Italy’s banking crisis should be more containable than, for instance, the sub-prime problems of 2008-09 or the run on Northern Rock in 2007. In Ireland, the €64bn cost of its 2010 bailout was the equivalent of 40 per cent of Irish GNP, and almost 60 per cent of sovereign debt, much higher than anything Italy faces. Ireland’s non-performing loans rose to a quarter of all bank lending at the peak of 2013, while in Italy the figure is 18 per cent. Spain’s banking crisis was also pretty serious, but bad loans at the banks halved after a government-supported “bad bank” was created in 2012.

Both those countries restructured their banks in line with new EU capital requirements and reform. Italy didn’t, which makes it much harder to fix them now. Officials in Brussels and Frankfurt will no doubt try to find ways around their own rules on state support, masking a bailout behind complex layers of financial engineering but that is all going to take time – and once markets panic, as we saw in 2008, there is no time.

To give him his due, Mr Renzi did have an elaborate plan to recapitalise the Italian banks, involving a state guarantee on part of the bad loans, which would then be packaged up, or “securitised”, and then sold on – a bit like sub-prime securities in the bad old days. Now that has gone out the window and the only plan available seems to be nationalisation, at least for the weaker ones – starting with Monte dei Paschi.

Poor old Monte dei Paschi’s shares had already fallen by nearly 90 per cent in the past year and from nearly €1,000 to less than €20 in the past five years, which doesn’t leave much for the equity holders. Nationalisation, of course, will leave them nothing at all.

Yesterday afternoon, Monte dei Paschi’s shares were down by another 4.2 per cent.

Italy is a lot bigger and more important than Ireland or even Spain. The euro zone’s third biggest economy is once again rudderless, without a proper government or a working strategy.

Its banks are not only weighed down with €360bn of problematic loans, but they are hopelessly unprofitable with, in the words of one cynical observer, “more branches than pizzerias” (Monte dei Paschi has 2,100). They have already lost half of their stock market value this year and if Monte dei Paschi goes down, will lose even more.

There is no question that the Italian referendum result has very real political and policy implications for the whole euro zone. The immediate fall in the euro to its lowest level in over a year, after Mr Renzi’s resignation, is a clear indication of the nervous days the whole European Union – and the rest of us – has now entered.

“Bottom line: bad for the euro, probably bad for equities,” is the blunt summing up of one bank analyst, Steve Englander of Citigroup. 2016 has turned out to be a bumpy year. And it’s not finished yet.

Ivan Fallon is a former business editor of The Sunday Times and the author of Black Horse Ride: The Inside Story of Lloyds and the Financial Crisis.

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