Making a Crisis out of an Italian Drama
Investors may have shrugged off the result of the Italian referendum a little too easily.
The country's stocks are falling the most in two weeks after a report the European Central Bank rejected Banca Monte dei Paschi di Siena SpA's request for more time to complete a 5 billion-euro ($5.4 billion) make-or-break capital raising.
That sent Italian bank stocks down more than 3 percent on Friday. But they're still up more than 10 percent since the weekend, something that suggests the ripple effects of Italy's voter backlash against the status quo have yet to be felt fully.
The ECB's tough line was to be expected: Germany holds elections next year, and the regulator needs to be seen to be taking a hard line on Italy.
That might be fair enough at a European level given Italy's poor track record in restoring its banks to health. Weak economic growth, slow-moving reforms and a political unwillingness to inflict losses on taxpayers have served to whack valuations. Maybe a strict deadline is what Europe's cheapest bank needs. Paschi is valued at 600 million euros -- despite having 160 billion euros in assets, according to Bloomberg data.
But it needn't be too painful if Europe can reach a deal to minimize the blow from burden-sharing rules that would demand individual investors, many of whom hold bonds of Italian banks, share the cost of any bailout.
Europe needs to tread carefully. In itself, Monte Paschi is not a systemically-important bank. But a botched rescue does have implications even for the country's bigger and healthier banks -- especially if they are also expected to help foot the bill for making the system healthier.
The cost of insuring against a debt default at Intesa Sanpaolo SpA and Unicredit SpA, two of Italy's biggest banks, rose sharply on Friday. Both of these banks have paid into previous attempts at fixing Italy's bad-loan and it's possible they will have to pay again.
There's also the small problem of how Monte Paschi's woes will hit UniCredit's plan to raise capital early next year. Unicredit is a bigger, more global and more systemically important bank than Monte Paschi -- but it can't easily unhook itself from problems at home if domestic banks' problems are set to get worse. As my Bloomberg View colleague Mark Gilbert wrote this week, tapping shareholders for money when Italy is in political disarray or if Monte Paschi is put into some kind of state-aid program won't be easy.
Letting a problem like Monte Paschi drag on wouldn't be good news for Italy or Europe: a weak banking system in the euro zone's third-largest economy only hobbles the ECB's monetary policy and its ability to protect taxpayers from future crises.
But a too hawkish approach at a politically sensitive time, with euroskeptic parties gaining ground, could have bad knock-on effects too if it leads to a system-wide loss of investor or depositor confidence. Europe should rediscover its ability to bend rules as well as enforce them.
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