Wry & Dry

Italy: the downward spirali* continues

No sooner was the ink dry on last week's W&D piece on the disaster that is Italy, and, especially its banks, than the situation worsens.

Mamma mia!

Italy is prepared to defy the EU and unilaterally pump billions of euros into its troubled banking system if it comes under severe systemic distress, a last-resort move that would smash through the bloc’s nascent regime for handling ailing banks.

Matteo Renzi, the Italian prime minister, is determined to intervene with public funds if necessary.

But, but, but.  The EU has rules that make creditors liable to fund bank rescues. This would be by 'bailing-in' investors in bonds issued by the banks - that is forcibly converting a debt instrument that pays interest and has a redemption value, into an equity instrument the value of which would be market determined and which wouldn't pay a dividend.  These rules do not apply to depositors.

The EU does not want governments to be liable to rescue banks.

Angela Merkel, German chancellor, last week rebuffed Italy’s request for a suspension of state aid and bail-in rules in order to recapitalise its banks. 

Mr Renzi has bristled at suggestions he is ignoring rules, saying he will not be “lectured by the school teacher”.

school teacherBut school-teacher Merkel controls the purse

The reality is that Italy is the eurozone’s biggest vulnerability following the shock outcome of the UK vote to leave the EU.  The share prices of bank stocks have fallen by over 30%.

The Italian PM's problem with the EU rules is that the significant bank bond holders are Italian retail investors.

These folk will vote in October's election.

*  Spirali: short-cut extruded pasta in the shape of a tube that spirals around