Italian Prime Minister Matteo Renzi has been scrambling to find a solution to clean up his country's banking system for months.
The Italian government has repeatedly met with European Union Commissioner for Competition Margrethe Vestager to negotiate the terms of possible government bailouts. But now Mr. Renzi has placed the struggle over government support on hold, switching gears to an approach that relies on private instead of government funding.
According to European negotiators, Mr. Renzi suddenly wants to try to find solutions without public funds. For instance, the severely battered major bank Banca Monte dei Paschi is to receive a capital injection of €5 billion ($5.54 billion), with the help of private investors, provided someone can be found who is willing to give the troubled bank more money.
Mr. Renzi reckons that with a private-sector solution, he could prevent the small investors who are Monte dei Paschi's creditors, to the tune of billions of euros, from being asked to pay up – which would be extremely unpopular in Italy. That's because Brussels had insisted that both the bank's shareholders and its creditors be involved in the bail-in.
The European Commission's position is clear: European Union laws on financial assistance only permit government aid when an entire country is threatened with financial instability, said Commission insiders, adding that this threat does not exist in Italy. "These exception provisions were not even applied in very serious cases in Spain, Greece and Slovenia," Ms. Vestager said recently.
Italy's bad loans represent a third of all problem loans in the entire euro zone.
This means that a compromise that had taken shape is also off the table for now, under which creditors and small bondholders alike would have shared in the bank's losses. In a second step, the Italian government would then have compensated the bondholders.
Both the European Commission and the German government could have lived with the compromise. It was important to Berlin that the new E.U. rules on rescuing banks were observed. But both the Commission and Berlin are likely to prefer Mr. Renzi's new approach, a bailout attempt without government involvement.
Italy's largest borderline case, Monte dei Paschi, appears to have broken the first ground. The bank needs the capital to unload a large package of bad loans, a condition that bank regulators with the European Central Bank had imposed on the crisis-ridden lender. After that, the traditional bank asked at least eight other banks whether they would guarantee a capital issue, the Reuters news agency reported.
The clock is ticking. The European Banking Authority plans to release the results of this year's fitness test for the European banking industry at 10 p.m. on Friday. If a solution is not found by then, Italy's banks will have to repair their balance sheets under far more difficult conditions. By no later than this weekend, it ought to be clear how the Italian bank problem will be addressed, said individuals involved in the negotiations.
As in the previous stress test in 2014, the results for the Italian banks are likely to be negative. The burden of bad loans is simply too big for a flattering outcome. The Italian central bank estimates the scope of problem loans on bank balance sheets at €333 billion as of the end of March. This corresponds to a whopping 16.4 percent of the banks' total loan portfolios.
But there are also other E.U. countries with large numbers of toxic loans, such as Ireland and Portugal, as EBA surveys show. But Italy is a special case, given the huge size of the problem. "Italy's bad loans represent a third of all problem loans in the entire euro zone," the International Monetary Fund wrote in an analysis. This alone makes them an issue with relevance for all of Europe.
Giovanni Sabatini, general director of the Italian Banking Association, vehemently contradicts this view. "The non-performing loans in Italy are not a systemic issue," he told Handelsblatt, explaining that some banks are affected by the problem and are now seeking market solutions to resolve it. But other banks are in good shape, he added. "I don't know why regulators are applying so much pressure to release bad loans in such a short amount of time," Mr. Sabatini said.
Because they are under time pressure, banks are forced to accept very poor prices for the loan packages, he explained. The advocates of repairing balance sheets quickly and decisively argue that this would put banks back in a position to more willingly finance the Italian economy with new loans.
Mr. Sabatini rejects this argument. "The demand for credit in Italy is weak, and it is primarily high-risk companies that are looking for loans," he said. But banks, with or without repaired balance sheets, are not overly interested in lending to these kinds of borrowers. "The strict rules for banks in relation to loans and provisions for losses on loans curbs the banks' ability to issue loans."
But this isn't the view held beyond Italy's borders, where the situation is seen as politically explosive. If a good solution for the banks is not found, it could weaken Mr. Renzi on the domestic political stage. He has tied his political future to a referendum in October to reform the Italian Senate, and negative headlines on the banking system are not helpful.
"Italy is a very large economy in the European Union and also plays an important role politically," said Abdoulaye Aboubakar, a bank analyst with DZ Bank. If Italy runs into difficulties, he added, they will take on a completely different dimension than a crisis in a smaller country.
This statement is all the more applicable after the British Brexit vote.
Yasmin Osman writes about banking for Handelsblatt and is based in Frankfurt. Ruth Berschens is a Brussels correspondent for Handelsblatt. Jan Hildebrand is deputy chief of political coverage for Handelsblatt. To contact the authors: [email protected], [email protected], [email protected]