Italy Banks May Need EU Safety Valve for Crisis, Millstein Says

  • Millstein says potential contagion tied to recapitalization
  • Solution in Italy could be similar to TARP in U.S., he says

Italian Bank Debt Changes Game for Renzi

The European Union may eventually help prop up the Italian banking system as the country seeks to recapitalize the institutions while minimizing the burden on its citizens, according to Jim Millstein, the former U.S. Treasury Department restructuring chief.

There’s a risk of “potential financial contagion” under rules designed to limit taxpayer bailout costs by inflicting losses on investors when banks fall short on capital, Millstein, who now runs his own firm, said Tuesday in a Bloomberg Television interview.

“There’s a safety valve for state aid,” he said. “So you could see the EU fashioning what we would call open bank assistance, which is, in effect, what we did with TARP,” a reference to the Troubled Asset Relief Program in 2008 in which the U.S. took stakes in the largest U.S. lenders.

German Chancellor Angela Merkel told reporters Tuesday in Berlin that she doesn’t see a broader crisis from the Italian lenders, as the EU meets to discuss stabilizing the financial system, which has been rattled by the decision of U.K voters to leave the EU. Italian banks have been saddled with about $400 billion of bad loans.

Italian Finance Minister Pier Carlo Padoan told CNBC he’s confident that his nation will reach an agreement that’s “within the rules.”

For more information about the Italian banking crisis, click here.

The extent to which bondholders or other creditors take losses has become a crucial point of negotiation in talks with EU leaders as Italian Prime Minister Matteo Renzi seeks to inject public funds into the banking system.

“This would be one of the first big bail-ins done in the new regime, and the thought was that would avoid contagion by foisting losses on bondholders and shareholders,” Millstein said. However, because the banks’ bonds were sold to depositors, “You’re inflicting damage to the people who would otherwise be spending money in your economy.”

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