Bruised, but not broke. Having failed the EU-wide stress tests, the Monte dei Paschi di Siena (MPS) has obtained the go-ahead for its rescue plan from the European Central Bank (ECB).
MPS is expected to sell a whopping 9,7 billions euros worth (so to speak) of bad performing loans, and, by the end of the year, to increase its capital by 5 billion euros.
Italy’s fourth largest bank – and the world’s oldest – now has its road map our of the crisis. But fresh questions have arisen as to where exactly the money will come from.
“The net value of the bank is currently 800 million euros,“ notes Panorama, a leading Italian weekly, “a capital increase of 5 billions represents a 6-fold increase of the net value of the bank. This implies asking the public to subscribe the remaining five sixth of new net value.“
Has everybody else done their maths? Don’t hold your breath.
Stress Tests: Germany fared worse
Last Friday the European Banking Authority (EBA) released the results of the stress tests, involving 51 European banks. The tests measure the capital solidity of each bank, and their ability to cope with challenges arising from a baseline and an adverse scenario. The tests have given banks indications as to their need to raise capital, reduce bad loans, etc.
German media were hardly enthusiastic about their banks performance. “And the stress for bank investors goes on,“ read a sarcastic headline by Frankfurter Allgemeine Zeitung. “Deutsche Bank and Commerzbank among Europe’s weakest banks,“ wrote Der Spiegel, “They would be severely affected by a new financial crisis“.
Commerzbank proved the point by issuing a profit warning on Tuesday. This sent European stock exchanges into a roller coaster before it’s Oktoberfest. For Commerzbank, however, the only way seems down: it shares have lost 44% of their value since beginning of the year.
Angela Merkel has so far kept quiet. She still has to reply to Renzi’s remark that “if MPS crisis is one, then Deutsche Bank is one hundred“. In fact, for every million the MPS has in bad loans, the Deutsche Bank has one billion in derivative exposure.
So, Renzi’s remark to Merkel was wrong, after all. The ratio of MPS bad loans to Deutsche Bank’s derivative exposure is not 1:100. It is 1:1000
On Atlas’s shoulders
Steering away from a state-funded bail-out was key to obtain the ECB’s go-ahead. But Italy was just as keen on avoiding the new EU-brokered Bail-in procedure. “MPS has issued 5 Billions euros of subordinated bonds [a high performing, but low-ranking debt in case of liquidation of a bank],” wrote l’Espresso, another Italian weekly, “these bonds, in case of a Bail-In, risk not being reimbursed”
Besides, since April Italy has successfully implemented its own bank-rescuing devices. Four small banks have been saved, all saddled, just as MPS now, by poor performing loans. The Italian Treasury created an alternative investment fund financed – here’s the trick – not by the taxpayer, but by large Italian banks.
Aptly called Atlas, the rescue fund financial shoulders were able to relieve small banks of 2 Billions euros in bad loans. Technically, Atlas would buy as many bad loans as needed to give the banks involved a new lease of life. The operation was victim of its success. By the time the four banks were rescued, Atlas’s financial shoulders had shrunk to half its initial capacity.
Bring on Jason, aka Atlas 2
To rescue the Monte dei Paschi in the same fashion, i.e. by relieving it from most of its bad loans, a new, dedicated “Fondo Alternativo d’Investimento“ was needed. By July, news begun circulating of an incoming, Treasury-engineered “Jason“ or “Atlas 2“.
The Golden Fleece is the money needed – without state help, and without the daunting Bail-in procedure – to recapitalize the MPS bank. Atlas 2 investment fund will buy most MPS’s bad loans, just as its predecessor did to rescue four local banks.
This double-pillar rescue plan is in line with ECB’s demands: recapitalization and cleaning up of most bad loans. The real issue now is where to find fresh private capital. We are talking of selling bad loans afterall, even if traded at a fraction of their original value. The investors buying it, usually specialized credit-recovery companies, will make a profit if they can recover a larger fraction of the loan than the one at which the loans traded.
Yet Rome remains confident. “In Italy there is no systemic crisis, and our banks, at least those reviewed by the Stress Tests, have done well,” Pierpaolo Baretta, undersecretary for the Economy ministry, told La Stampa, “This is important because it allows us to deal with crisis points with more lucidity. The MPS rescue plan we have agreed with the BCE, once implemented, would put MPS in the middle of the Stress Test ranking”.
No such plans have yet been devised in Germany to rescue the Deutsche Bank. And the ECB Stress Tests did not consider derivative exposure. It is really no wonder that Angela Merkel is, for once, keeping quiet about the rescue deal Rome has just brokered with the ECB.