Thomson Reuters
A failure to secure a bailout could end up "threatening the solvency of the Italian state itself," according to FT columnist Gideon Rachman.
The rejection of constitutional reform in Sunday's referendum - and the resignation of prime minister Matteo Renzi - has made the Italian economic picture more uncertain, potentially scaring off the private investors who had previously said they would cooperate with MPS's plan to have market investors take care of its non-performing loans (NPLs). Thus the rumours that the state may be forced to step in with taxpayers' money.
While MPS "only" needs €5 billion to make its bad loan consolidation plan work, the fear now is that if the state has to step in - or fails to step in - it could lead to a series of ever-larger dominoes falling that, ultimately, could threaten the entire Italian economy.
This is how those dominoes are currently lined up:
- Most immediately, if MPS cannot get its €5 billion recapitalisation done ...
- ... then the picture starts to look bleaker for Unicredit, a bigger bank that needs a €13 billion rescue from its NPL book.
- The entire system may ultimately need an injection of around €52 billion, according to Deutsche Bank analyst Paola Sabbione.
- And behind that, there are €360 billion in impaired loans in the entire system, according to the Bank of Italy, of which €200 billion are of the worst sort, non-performing "sofferenze." (€360 billion is the equivalent of about 20% of Italian GDP.)
Marco Stringa of Deutsche Bank, published a note after the referendum saying that politics now militated against an easy fix for Italy. If the private market cannot backstop Italy's banks, the ECB may also be reluctant to.
There are elections in France and Germany next year, and it is unlikely that politicians there will be willing to publicly support a bailout for Italy, even if they wanted to.
"Due to a likely deteriorating sentiment, some of the ongoing bank recapitalisation plans might be more difficult and could be postponed, opening to a period of high volatility," Stringa wrote. "As a consequence of the previous point, NPL clean ups might be delayed."
UBS analyst Themis Themistocleous told clients that as each debt deal fails, it makes the next one less likely, as the price of risk increases and the putative value of the underlying bonds decreases (emphasis ours):
"This would happen if investors, in particular foreigners, decided to pull out of an upcoming capital increase due to lack of clarity on the country's political future. Another leg of burden sharing on subordinated debt, following last year's episodes, would be detrimental to the Italian banking sector, in particular the smaller lenders, which could face issues in funding in the subordinated debt market in the near future. The uncertainty following the strong victory of the 'No' side may hamper confidence in the ability to carry out banking sector consolidation and complete the ongoing banking sector reforms. Italian banks' subordinated debt reflect some volatility, in particular on subordinated debt of the smaller and more domestic-based lenders. Senior unsecured debt is being affected by spread volatility, though to a minor extent versus the more subordinated segments."
And, of course, there is the non-bank Italian economy to worry about. If it goes into recession, it turn more good loans into bad ones, making the situation worse. That's why Rachman thinks the worst-case scenario is that Italy becomes the new Greece - permanently in debt, and unable to pay:
The immediate danger is to the Italian banking system. In the new atmosphere of crisis, the proposed recapitalisation of troubled lenders - in particular Monte dei Paschi di Siena - is threatened. That could lead to demands for state bailouts, which will be difficult given that the state is already heavily indebted. Revived worries about the size of Italy's debt could then frighten investors, driving up interest rates and threatening the solvency of the Italian state itself.