So is the ever-worsening Monte dei Paschi (MPS) di Siena crisis just a blip in the system or is "Italy about to destroy [the] eurozone" as British tabloids would put it? Lest anyone have any doubts, the ongoing crisis involving Italy's third-largest bank this festive season underlines the point, namely that there is serious trouble in the Italian banking world.
This is not entirely new, of course. Remember the Banco Ambrosiano failure in the 1980s, the Banco di Napoli bailout in the 1990s and the ABN AMRO takeover of Antonveneta bank in 2005? Is Armageddon just around the corner or will the system stagger on, as per usual? When I asked one senior Italian banker that question, his reply was, not surprisingly, defensive: "Now, the commentators who express those negative forecasts, are they the same ones who forecast that Brexit would be defeated and that Hillary Clinton would win the US presidential contest? Or maybe they are the commentators who predicted a market holocaust in Italy if Renzi's reform referendum were defeated?"
This most recent crisis reminds me of my first experience of Italian banks, some 30 years ago. Having arrived in Italy to start off a brave new life with little or no institutional backing, I had taken along my very own little “nest egg”, namely an Irish income tax rebate cheque worth almost IR£3,000, a fortune of in those far-off days. However, when I presented the cheque at the huge head office of Credito Italiano in the southern suburbs of Rome, I was relieved of the cheque all right, but I received no money in return.
Half value
Over the next six weeks, I made a series of journeys out to the bank, consistently being told it was very difficult to get an Irish cheque cleared. At one point, the man I regularly dealt with offered to settle the matter by paying me approximately half the cheque’s value. Oh yeah?
In the end, it required the intervention of senior Credito Italiano colleagues (one of whom had been fortuitously encountered socially) to persuade the man that he really should just pay up the full amount. Ever since, my faith in the Italian banking system has been limited.
The fact that Italy's biggest bank, UniCredit (the modern-day version of Credito Italiano) has just launched a €13 billion fundraiser in search of fresh capital and that the world's oldest bank, MPS, has essentially been given clearance for a bailout by a €20 billion government decree would suggest that circumspection is still required. Italian banks sometimes miss out on "best practices" where customer relations are concerned.
This time last year, more than 130,000 small investors lost their life savings when four local banks – Cassa di Risparmio di Ferrara, Banca Delle Marche, CariChieti and Banca Etruria – got into trouble. The problem then was that the banks' rescue, co-ordinated by the Renzi-led government, came via a €4 billion fund that was a painful a "bailin" rather than an institutional "bailout".
Taxpayer pain
In other words, Etruria bank shareholders and Etruria bank bondholders (mainly regular clients) and not the taxpayer had to pick up the tab. This raises the question as to why these local banks had chosen to sell inappropriate, high-risk products such as subordinated bank bonds to regular clients, rather than to larger institutional and professional investors. Second, and more ominously, did these small bank "best practices" reflect in any way the modus operandi of Italy's large nationwide banks?
Seen from outside, the Italian banking system hardly looks healthy. Currently, Italian banks have approximately €360 billion of bad loans on their books. In other words, 17-21 per cent of Italian loans are non-performing loans, a figure that represents one-fifth of gross domestic product, by far the highest in the G7 countries. It amounts to about one-third of all the euro zone’s bad debt and to about one-fifth of all consumer loans in Italy.
As regards MPS and its failure to raise a desperately needed €5 billion of capital just before Christmas, are we now looking at what the Financial Times calls a "slow-motion train crash"? The fact the European Central Bank this week stated that the MPS capital shortfall had risen to €8.8 billion following a "rapid deterioration" in MPS liquidity over the past month hardly augurs well.
‘Wobbly’ banks
In the wake of decades (if not centuries) of bank management cronyism that has involved "political" managerial appointments, costly acquisitions, fraud, discount rate loans to friends, hidden derivatives and much else at both local and national levels, is there worse to come? Commentators suggest that two other mid-sized banks, the Popolare di Veneto and Veneto Banca, are looking just a bit "wobbly" right now.
It has often been argued the last real chance for Italian bank reform came under technocrat prime minister Mario Monti in 2011-2013 when he had a political reform mandate and when state intervention was still allowed under EU regulations.
It is also possible that ex-prime minister Matteo Renzi exacerbated the MPS situation by putting it on the back boiler this autumn as he concentrated on his ill-fated reform referendum. How much was the "rapid deterioration" indicated by the ECB prompted by government indecision and uncertainty?
While many commentators are confident UniCredit can dig itself out, the same can hardly be said with much confidence of MPS. A rough ride may be in store in 2017.
