EU Approves $166 Billion Liquidity Guarantee for Italy Banks

Updated on
  • Support is separate from possible recapitalization for banks
  • EU says it’s precautionary, no expectation it will be used

Italy was given the go-ahead by the European Commission to supply as much as 150 billion euros ($166 billion) in government liquidity guarantees for its struggling banks until the end of the year, according to an EU official.

Liquidity support for solvent banks is a “precautionary measure” requested by Italy, the EU said in an e-mailed statement. The guarantees of senior debt allow lenders to maintain access to financing, often at a better price.

“There is no expectation that the need to use this” should arise, the commission said. The support was approved on June 26, the EU official said on condition of anonymity, and wasn’t made public before now.

Saddled with some 360 billion euros in soured loans and a sputtering economy, Italy’s lenders have been sliding toward the type of crisis that other European countries dealt with years ago. The government’s latest effort -- getting the biggest banks to back a fund to rescue the weakest -- failed to convince investors.

Italy asked for liquidity support that the EU has approved for countries including Greece, Cyprus, Portugal and Poland. The financial backstop is provided under EU state-aid rules, usually for six months.

Belgian Backstops

As an example, Dexia SA, the Belgian-French lender being wound down, has about 68.2 billion euros of senior debt outstanding that is backed by either Belgium, France or Luxembourg, according to the latest data from the National Bank of Belgium. The bank has gone through three separate state-guarantee backstops since 2008.

The country is separately weighing a plan to provide as much as 40 billion euros to recapitalize troubled lenders after banking shares were hammered following the U.K.’s vote to secede from the bloc, according to a person with knowledge of the plan.

Italy’s recapitalization efforts ran into a roadblock this week, as Germany opposed allowing Prime Minister Matteo Renzi to shield investors from losses in the plan.

Italian media have reported that the government is pursuing a six-month waiver of EU state-aid rules, allowing it to shore up banks without forcing investors to share losses.

The Italian Finance Ministry didn’t immediately comment on the liquidity support.