Italy’s €5bn ‘Nama’ hopes to manage sector’s $360bn in bad loans

Industry funded bailout proposed by finance minister Pier Carlo Padoan may run into ‘state aid’ difficulties with EU

Pier Carlo Padoan, Italy’s finance minister, who has announced an industry-led bailout programme for the country’s troubled banking sector. Photographer: Alessia Pierdomenico/Bloomberg

Pier Carlo Padoan, Italy’s finance minister, who has announced an industry-led bailout programme for the country’s troubled banking sector. Photographer: Alessia Pierdomenico/Bloomberg

 

It remains unclear if a new plan proposed on Monday by finance minister Pier Carlo Padoan to deal with a potential Italian banking crisis, will prove acceptable to EU regulators. Does this Italian version of Nama, Atlante, which involves a €5 billion, industry-led bailout fund to help weaker banks bolster capital and to buy bad loans – largely fuelled by healthy banks, banking foundations, pensions firms and insurers, constitute that prohibited substance, namely state aid?

And even if it does, will it be enough?

Minister Padoan’s announcement follows weeks of speculation that Italy might introduce some measure with which to counter speculation about an imminent banking crisis. Speaking at an economics conference on Saturday, Mr Padoan had said the Italian banking system “remains solid”, adding however that its current difficulties represent “one of the most profound” signs of the recession.

Analysts and observers, especially foreign critics, have expressed concern about Italy ever since four local banks – Cassa di Risparmio di Ferrara, Banca Delle Marche, CariChietie and Banca Etruria – got into trouble last autumn. Around 130,000 small investors and local clients lost their money because of ill-advised investments in inappropriate, high risk products such as subordinated bank bonds.

Even if those particular problems at four of Italy’s many small, territory linked banks did not mean that the whole national system was about to fall down, (the four banks involved hold just 1 per cent of Italian bank deposits), it was still very bad PR. The fright generated by that mini-crash drew worried attention to the bigger banks and specifically to the realisation that Italian banks currently have something like €360 billion of bad loans.

In other words, around 17-21 per cent of Italian loans are non-performing, a figure that represents a fifth of GDP, by far the highest in the G7 countries.

Minister Padoan said correctly on Saturday that Italy’s banking problems go back at least “a couple of decades”, adding that they had been clearly exacerbated by the current global crisis. The minister did not say it but obviously one of the old, inherited problems of the system was a lack of competitiveness. Poor customer service in relation to lending, credit card flexibility, online banking, even to opening hours were the expression of old fashioned, cautious and over-bureaucratic work practises.

Not that caution is always bad. When the 2007-08 crisis broke, it had a relatively minor impact on Italy’s banking system, partly because the economy had been sluggish for two decades anyway but also because (most) Italian banks had not gone around the world investing unwisely. They had been too cautious and, in that case, it was good for them.

However, a worrying aspect of last autumn’s local bank crisis was that it evidenced a clientelist, non-meritocratic administration of bank lending. Essentially, you loaned money not to the soundest commercial prospect but rather to your small group of cronies. Many commentators believe that, at national level, the banking system is peppered with exactly the same clientelist, non-meritocratic practises.

With the crisis (depression?) now in its eighth year, with the Italian economy still nailed down by Gulliver like statistics – national debt represents 132 per cent of GDP, government forecast growth is 1.2 per cent for 2016, 1.4 per cent for 2017, unemployment is around 12 per cent and youth unemployment well over 40 per cent – it is inevitable that critics might cast a cold eye on Italy and its banks.

That is not to say, as some foreign critics have, that Italian banks are about “to go down like dominoes” and that the Italian system is “drowning in NPLs [non-performing loans]”. However, something had to be done about the NPL collection, even if the limited involvement of the Treasury-owned Cassa Depositi e Presititi in the new scheme could yet cause problems at EU level. Industry analysts have already suggested that it may not prove acceptable to the European Commission.

Those same analysts argue that current market pressure on Italian banks – for example, Italy’s oldest and third largest bank, Monte Paschi di Siena, has experienced a 56 per cent drop in share values in 2016 – is a response to more than commercial considerations. If you claim, as did Italy’s dynamic prime minister, Matteo Renzi, just before Christmas that Italian banks are “more solid than German banks”, well you can expect a negative reaction from some quarters.

Italian banking insiders also argue that foreign critics exaggerate when speaking of “turbulence” in what, they claim, is basically a solid system. Significantly, on Saturday, Minister Padoan argued that the European Union should currently be more worried about agreeing common policies on migration, youth unemployment and terrorism rather than arguing about flexibility versus austerity.

In other words, you have bigger problems to be worrying about than Italian banks.

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