The credibility of Italy's rescue plan for its banking system is being stretched thinner than a strand of vermicelli. Reality is bound to catch up, sooner or later.
It was always going to be a struggle for Atlante, the state-backed rescue fund, to both fund banks' capital raisings and buy up their bad loans. The fund's 4.25 billion-euro ($4.8 billion) firepower pales in comparison with the 360 billion euros of troubled loans burdening the Italian economy.
But the news that Atlante will in all likelihood have to step in and support the second billion-euro share sale by a bank in as many months is a stark sign that the rescue bill will be much bigger than expected -- and hasn't created any step-change in investor confidence.
Faced with little appetite for Veneto Banca's 1 billion-euro IPO from institutional investors, Atlante has pledged to buy any stock left over -- a repeat of what it did in Banca Popolare di Vicenza's 1.8 billion-euro initial public offering earlier this year.
On one level the problem lies with Italy's rescue plan itself. It seeks to fulfil regulators' requests to inject more capital without falling foul of state-aid, and without inflicting losses that the system might not be able to bear.
The price of Veneto Banca's shares has been set at 10 to 50 euro cents. That equates about a third of the bank's tangible book value, a valuation so high relative to peers it was branded nonsense by one analyst. It was a similar story with Vicenza. If an IPO process can't find a market price, why should investors follow?
But the other problem is that none of this is happening in a vacuum. With loan demand in the euro zone still sluggish and regulators cracking down on weak balance sheets, investors are right to fret that capital-raisings today will only set the stage for more tomorrow.
Spain's Banco Popular last week shocked the market with a 2.5 billion-euro capital increase -- a surprise mainly because the bank had been given a clean bill of capital health by regulators. This doesn't bode well for other banks.
Based on their Texas ratios , which measure banks' troubled loans relative to their capital and loan-loss reserves, several Italian lenders such as Banco Popolare and Monte Paschi are among the most vulnerable, according to analysts at Goldman Sachs.
Optimists reckon Atlante has what it takes to fix the problems in today's in-tray. But that's looking increasingly like a comfortable fantasy.
The other options are painful: banks unable to raise capital or find a buyer could be allowed to fail; Atlante could seek more capital from the lenders backing it, or use debt to give the pool greater firepower; or UniCredit and Intesa, the country's biggest banks, might be coaxed into taking over ailing banks.
All of these solutions would bring pain and political risk. But just muddling through in the hope of a happy ending is looking increasingly dangerous.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
If the ratio is 100% or more, it's a sign a bank won't have money to cover losses. Of course, that doesn't mean disaster is inevitable. A bank can raise capital.
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