Italy blinks and guarantees Banca Carige’s future bond issues

Thousands of depositors located in deputy prime minister Matteo Salvini’s northern base

A Banca Carige bank branch in Rome.

A Banca Carige bank branch in Rome.

 

Italy’s populist leaders just blinked again. Faced with a potential bank failure that could wipe out thousands of depositors in deputy prime minister Matteo Salvini’s northern base, the cabinet approved state guarantees for any future bond issues by cash-strapped Banca Carige and signalled its support for a possible recapitalisation.

Rhetoric

The ruling coalition’s anti-bank rhetoric now appears to have gone the way of last year’s pledges to defy the European Union over the budget, with the government vowing instead “to safeguard the rights and interests of savers.”

Like Greek prime minister Alexis Tsipras before them, Mr Salvini, prime minister Giuseppe Conte and their anti-establishment ally Luigi Di Maio of the Five Star Movement are finding out how hard it is to live up to their campaign rhetoric when voters’ economic interests are on the line.

Italy’s interior minister and deputy prime minister Matteo Salvini.
Italy’s interior minister and deputy prime minister Matteo Salvini.

Despite importance to its Genoa base and the surrounding region, Carige doesn’t pose a significant risk to national or regional banking systems, according to Italian and European officials.

The bank has about €25 billion euros in assets and its market value has plummeted to €84 million euros. At an urgent, night-time cabinet meeting on Monday, ministers backed a decree law which “offers the broadest guarantees to safeguard the rights and interests of savers” in Carige, Mr Conte said in a text message.

The measures, which have immediate effect, allow the bank’s special administrators to pursue efforts to consolidate assets and relaunch the bank’s activities, the prime minister said. The European Central Bank (ECB) took the unprecedented step of placing Carige in temporary administration after the bank’s main investor blocked a vital capital increase in late December, leaving the lender without one of the two pillars of a turnaround plan approved by the ECB.

Special administrators were given a three-month mandate to reduce balance sheet risks and find a possible partner for the bank.

Recapitalisation

The Rome government may consider a request for a precautionary recapitalisation to restore the lender’s capital ratio, it said in a statement after the cabinet meeting.

Italian prime minister Giuseppe Conte.
Italian prime minister Giuseppe Conte.

That was the solution used to rescue failing Banca Monte dei Paschi di Siena in 2017, a move that Five Star slammed. “In consideration of the results of the recent stress exercise of the bank, the decree includes the possibility for the lender to access – through a specific request – a public recapitalisation for precautionary purposes,” the government said in a statement. The government decree makes it possible for Carige to benefit from measures to boost liquidity, including a state guarantee on bonds to be issued in the future, or on financing given by the Bank of Italy.

All the guarantees are to respect European Union rules on state aid, the government said. The administrators in charge of Carige are seeking to review a December agreement that saw Italy’s deposit guarantee fund buy €320 million euros of bonds from the troubled lender to meet ECB requirements.

On Monday, the administrators in charge had met with treasury officials to discuss the possible sale of part of the lender’s soured debt to state-owned SGA SpA, which manages the bad assets of the two Veneto banks liquidated in 2017, a source said.

Contacts with SGA managers took place last week to possibly sell to the state-owned firm the riskiest portions of its bad loans. The bank’s administrators have started due diligence on a plan to further reduce non-performing loans, Carige said in a statement Tuesday.

Guarantees

The administrators are set to activate the state guarantees on bond issues, according to the statement. The idea of a precautionary recapitalisation for the bank remains as only a “residual option.”

Italian deputy prime minister Luigi Di Maio.
Italian deputy prime minister Luigi Di Maio.

Carige is the last large lender in the country that the European Central Bank asked to bolster its finances. While Carige isn’t a big national bank, its collapse would hurt a region of Italy already hit by industrial failures, delays in developing infrastructure and more recently by the deadly bridge collapse in Genoa.

It would also spark a political debate, putting the country and its financial industry in the spotlight again. The ruling coalition partners, the anti-migration League and the anti-establishment Five Star Movement – whose founder Beppe Grillo hails from Genoa – have been trying to find a solution to the banking crisis.

Mr Salvini’s League is pushing for a larger bank to step in to take over Carige, and wants to use public money to sweeten the deal. The crisis poses a dilemma for the populists, who denounced previous government help for the banking sector.

Five Star attacked Intesa Sanpaolo SpA’s takeover of the two Veneto-based banks in 2017, which required almost €5 billion euros of public money as well as state guarantees to mitigate the risk of additional losses coming to light. – Bloomberg