Italy's Bank Plan: Atlas Fudged

It's unclear the fund is big enough or legal under EU rules

How do you solve a 360 billion-euro ($411 billion) problem with 5 billion euros? With great difficulty.

Italy's banks are groaning under the weight of 360 billion euros of souring loans, an encumbrance that's curbed lending (and economic growth) and left investors fretting about lenders' financial health.

Debt Woes

Italian banks have some of the highest non-performing loan ratios in Europe

Source: Bloomberg Intelligence

On Monday, the government finally cajoled the banks, pension funds and insurers into action. But a planned 5 billion-euro bailout fund to help weaker banks bolster capital and to buy bad loans is underwhelming.

For starters, the fund, dubbed Atlante, is small -- even if it takes its name from the Greek god Atlas.

It's significantly less than the 8 billion euros Banca Monte dei Paschi di Siena has raised in two rights offerings since 2014, for example. The Siena-based lender now has a market value of just 1.6 billion euros.

Some more context: a single Italian lender, Popolare di Vicenza, is under pressure from the European Central Bank to raise 1.8 billion euros in coming days.

It's also difficult to see how Atlante will work in practice. An independent manager, Quaestio Capital Management, will run the fund. But how will it decide which banks to help (and which ones will be left to continue struggling) or which loans to buy?

Such decisions will be fraught with political risk given Italy's highly fragmented and regionalized banking industry. And it's hard to see how it will be immune from political pressure.

Finally, there will be concerns about whether Atlante will ever even come to fruition. The major hurdle is European rules that ban state aid to failing companies. Italy's state lender Cassa Depositi e Prestiti is backing the fund, something that is sure to raise eyebrows with European Union regulators.

The Italian government will be hoping to persuade European regulators that Cassa Depositi's role is so small the rescue will be classed as a private sector one that won't fall foul of the state-aid rules.

Prime minister Matteo Renzi will have to keep his fingers crossed that having the healthy banks come to the aid of the weak doesn't just spread the worst of the banking industry's problems around.

And then he will have to hope Atlante's scant resources will be enough to stave off the deepest concerns about the banks and encourage other private investors to put money into the industry.

Long Way Back

Italian bank stocks have ticked up recently but they're still well below the broader market for the past year

Source: Bloomberg

Here, the government could help itself by speeding up Italy's leisurely bankruptcy procedures. Current laws are a major impediment to the sale of bad debts to international investors. But here, too, Renzi could run into opposition, this time from lawmakers who view change as a threat to jobs and small businesses.

Investors are going to take some persuading. An index of Italian bank stocks has gained about 10 percent in recent days in anticipation of the government's plan. But, step back, and the measure is still down about 45 percent from its highest point of the past year. More troublingly, the FTSE Italia All Share Banks Index trades at half book value.

Reduced Price

Many Italian bank shares trade well below book value and lower than the average for Europe's banks

Source: Bloomberg

Atlante comes three months after the Italian government's previous effort to strike a solution to the bad loan problem.

That plan -- to offer government-backed guarantees for buyers of bad loans -- gained little traction, because it wasn't clear how it would work in practice and how it would measure up to state-aid rules.

It's hard to see how Atlante will make much headway.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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    Duncan Mavin in London at

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