The latest red flag about the solvency and viability of the European banking sector came this morning from none other than the chairman of Societe General and former ECB executive board member, Lorenzo Bini Smaghi who warned today that Italy’s banking crisis could spread to the rest of Europe.
“The whole banking market is under pressure,” the former European Central Bank executive board member said in an interview with Bloomberg Television on Wednesday. “We adopted rules on public money; these rules must be assessed in a market that has a potential crisis to decide whether some suspension needs to be applied.”
But what is most concerning is that one can make the argument that the former central banker was almost doing all he can to stoke panic: “There is no rationality in the market, it’s all very emotional. People are starting to withdraw from the market and to go to very liquid and safe assets.”
Why pour even more gasoline on the European banking fire? Simple: the financier is hoping for an overhaul of European bailout regulations saying that “rules limiting state aid to lenders should be reconsidered to prevent greater upheaval.” In other words, the countdown to the elimination of the brand new “bail in” process as a banking resolution mechanism appears to have started in order to avoid depositor panic that they may be next in line to “impairments”.
A summary of Bini Smaghi’s key points:
- “There is no rationality in the market”
- People are starting to withdraw from the market and to go to very liquid assets
- “The bail-in wil scare the markets and small investors”
- Europe needs a credible back-stop for its banking system, EU banking rules need to be assessed, policy makers need to be pragmatic
- European solution is needed for Italy; “in this situation, you need policy to step in”
- Opportunity to consolidate Italian banking industry
- Germany has too many banks that are not profitable
- Market concern on Brexit is that we’re in for “very long” negotiations
- U.K. economy is sitting on major imbalances’’
- U.K. cutting corporate taxes creates risk of tax competition across Europe, leading to bigger deficits and debts
His interview is below:
The stress across Europe’s various institutions is palpable: as we have continuously reported, European banking stocks resumed their descent (especially now that even BlackRock has said it is selling the sector) as policy makers disagreed and sometimes issued contradictory statements about what may come next. Deutsche Bank AG, Germany’s largest lender, tumbled another 6.1% to its lowest level since at least 1989. Societe Generale, France’s second-biggest bank, which Bini Smaghi has chaired for just over a year, fell 1.8 percent as of 2 p.m. in Paris.
Nowhere was the confusion, greater, however, than in Italy where Finance Undersecretary Pier Paolo Baretta, responding to the unprecedented implosion of the country’s 3rd largest and most insolvent bank, Monte Paschi, said in an interview on RAI radio Wednesday morning that a “technical solution” on Monte Paschi could be hours away, before issuing a statement an hour later that said “no intervention is expected in the next few hours.”
German Finance Minister Wolfgang Schaeuble, speaking at a news conference in Berlin hours later, said his Italian counterpart Pier Carlo Padoan told him that Italy intends to stick to the banking-union rules.
The resulting confusion meant that while Monte Paschi has seen a brief rebound on hopes of some bailout, other Italian banks are now sinking fast: the largest Italian lender, UniCredit SpA, has slumped more than 60% this year and replaced its chief executive officer amid speculation the bank will need to tap its investors for more capital. Its shares fell 1.4% Wednesday.
Yet while the Italian fire rages, Europe refuses to concede to Matteo Renzi’s demands for a bail out instead of a bail in. “Despite the struggling market, it’s important to protect the regulations established for European banks since the financial crisis” said Klaus Regling, CEO of the EU Stabilization Fund in a separate television interview. Many solutions under the existing rules are still available to Italy, he said, the main of which of course is impairing depositors in one or more insolvent banks and thus launching an even greater bank run and even more bank failures.
“The Italian government is in a dialogue with the European Commission on how to apply the framework to these specific circumstances,” Regling said. “I am confident they will find a way.”
For now no way is obvious.
Meanwhile, the former ECBer did all he could to push up the panic level: Bini Smaghi said on Bloomberg TV that Europe’s banking market faces the risk of a systemic crisis unless governments accept the idea of taxpayer money as the ultimate recourse. Any intervention should be as swift as possible, he said.
In other words, going back to square one.
Both Italy and Germany have too many banks that are not profitable and more consolidation is needed, he said. Italy must do more to deal with non-performing loans, and Prime Minister Matteo Renzi will have to take politically unpopular steps, including encouraging mergers that will lead to job cuts, Bini Smaghi said.
“What’s needed is a European solution,” he said. “So far, we’ve had national solutions. We need a clear backstop.”
Translation: all that macroprodential bullshit we have heard so much about really means just one thing: more taxpayer bailouts are inevitable.
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