The Italian job.

Italian Taxpayers foot the bill, rescue banks and bondholders

by Michael Roberts

The Italian government is putting up €17bn in public money (from the ‘magic money tree’) to bail out two Venetian banks.  The banks will not be nationalised, but instead handed over to Intesa Sanpaolo Spa, Italy’s biggest bank, for the token sum of one euro!

Intesa will guarantee the cash deposits of the Venetian banks, but it will sack several thousand bank employees, while getting 900 new branches and billions in financial guarantees from the government.  Intesa will take over all the performing loans from the Venetian banks, while the state gets to keep all the bad debts that it must either write off or try to collect over time.

So yet again, the reckless activities of some banks and the stagnation of the economy that made many companies unable to pay their debts are to be ‘resolved’ by the state stumping up the cash.  The bailout is equivalent to 1% of Italy’s GDP, adding yet more to the size of Italy’s already massive public sector debt of 135% of GDP.  Intesa gets some cleaned-up banks for just one euro, just as JP Morgan got the banking network of Bear Stearns in the global financial crash for one dollar – all paid for by taxes or government borrowing.  The state and the people get nothing for their €17bn.

What is even more ironic is that the Italian deal breaks the very banking rules set up by the EU governments after the global financial crash to avoid bank investors (bondholders) being bailed out at taxpayer expense.  Under the EU’s Bank Recovery and Resolution Directive (BRRD), such bailouts should first be funded by bank bondholders, including so-called senior bonds, and only after that, in the extreme, by EU funds.  But the EU’s Single Resolution Board accepted, under pressure from the Italian government, that there was no real ‘banking crisis’ that required EU intervention and so it could be dealt with by Italy alone.

After all, the Venetian banks had only 2% of the banking system. But what was not taken into account was the already huge losses being run up by other Italian banks, like Monte dei Paschi.  Indeed, Italy has €300bn in non-performing loans on its bank books, or some 20% of GDP. A resolution under EU rules would have required Italy to find another €12bn for the country’s deposit guarantee fund. And UniCredit, Monte dei Paschi di Siena and UBI Banca would have had to make further capital calls and may have been deserted by investors.

The deal has been frowned upon by Germany, as it bends the new banking rules to the point of making them irrelevant – but then the head of the ECB, Mario Draghi, is an Italian and former head of Italy’s central bank.  For the Germans, it is a signal that further integration financially in the Euro area is impossible if nation states break the rules flagrantly.

Politically, it helps the ruling centre-left Democrats in the bid by its leader Matteo Renzi to regain his position as prime minister in any election due by May.  If the banks had been bankrupted, deposits may have been lost and bondholders liquidated – bad electorally as many bondholders are small business people persuaded by the banks to invest in bank bonds.  The news of the deal has been greeted with rapture by the stock market.

Thus we have another bank bailout, nine years since the global financial crash that nationalizes the losses caused by the bankers and privatizes gains for those bankers remaining: exactly what EU banking union rules were meant to stop.   Thousands of bank employees will be out of work; but bank investors and bondholders are laughing all the way to the new bank.  The state racks up more debt and thus increases the pressure to introduce more austerity to service the debt.  And other bankers know that, if they make a mess of things, they can escape with a state bailout and carry on as before.
There is no idea in this deal that the people through the state could take these banks (and the other major banks) into public ownership and make banking a public service for households and small businesses and not be used as vehicles for reckless speculation, greed and corruption.  On the contrary, this Italian job is business as usual.