Europe’s
next crisis is Renzi and the banks
A
fight in Brussels over the fate of Italy’s troubled financial
system is prelude to a long, hot political autumn in Rome.
By
Francesco Guerrera ,
Jacopo Barigazzi
and
Silvia Sciorilli
Borrelli
7/19/16, 3:38 PM CET
Matteo Renzi, the
new broom of Italian politics, is in danger of being swept away.
The youthful Italian
prime minister who ascended to power in 2014 as the leader of a new
generation seemingly destined to clean up the country’s stale
politics is now facing a combustive cocktail of financial crisis,
political miscalculations, and anti-European populism.
At stake is not only
the future of the 41-year-old former mayor of Florence — but also
Italy’s relationship with the European Union and the health of the
Continent’s fragile banking system.
Time is not Renzi’s
friend. By July 29, EU banking regulators are widely expected to say
that Monte dei Paschi di Siena (MPS), the world’s oldest bank, will
need an emergency infusion of capital. That decision will sound the
starting gun on a rescue package not just for MPS but for the entire
Italian banking sector.
Renzi’s immediate
dilemma is clear: He must convince Brussels and skeptical member
countries, led by Germany, to let Italy inject money into a banking
sector in dire need of repair.
But he needs to do
so without triggering EU rules that would penalize retail investors,
many of them individual savers who may not have realized that the
bonds they were buying were at risk of suddenly becoming worthless.
Wiping out the
thousands of households that bought bonds in Italy’s banks would be
tantamount to political suicide in the country’s charged social
climate.
In the words of a
high-ranking Italian official, if Matteo Renzi, above, penalizes MPS,
“he is politically dead an hour later”
In the words of a
high-ranking Italian official, if Matteo Renzi, above, penalizes MPS,
“he is politically dead an hour later” | Andreas Solaro/AFP via
Getty Images
It’s a very tight
needle to thread for a man who styles himself as il rottamatore —
the demolition man — of Italian politics. And righting a banking
sector saddled by more than €360 billion in bad loans and decades
of mismanagement is not even the biggest of Renzi’s challenges. In
the fall, Italians will go to the polls in a referendum on
constitutional reform that could provide Italy with its own “Brexit
moment.”
If the new regime is
voted down, Renzi has pledged to go — as David Cameron did after he
lost the Brexit vote. As with the former British prime minister,
Renzi’s problem is in large part one of his own making. Last year,
when he was riding high in the polls, Renzi promised he would step
down if his reforms weren’t made into law. In doing so, he ensured
that the vote would become a referendum not only on his reforms, but
on his government.
Should Renzi step
down, the transfer of power is unlikely to go as smoothly as it has
in the U.K. His departure would almost certainly trigger political
instability and early elections.
A strong showing by
the populist 5Star Movement would throw Italian politics into chaos
and upend its relationship with the EU. 5Star won the local elections
in Rome and Turin in June and is currently ahead in national polls.
“It’s one thing to have a British problem,” says a senior
banker. “It’s another thing to have a British and an Italian
problem.”
European Commission
President Jean-Claude Juncker is among those personally worried for
the Italian prime minister’s future, according to a senior
Commission official. Renzi, a man who saw himself as a revolutionary
force in Italy’s atrophic political system, risks going down in
history as the leader who handed one of the EU’s founding members
to a party of Euroskeptics fronted by the comedian Beppe Grillo.
Politically toxic
Renzi has his work
cut out to save MPS — a bank founded before Columbus discovered
America that survived the plague and two world wars — and the rest
of the Italian banking system. The bank is Italy’s third largest,
and its collapse could trigger a domino effect, sparking runs on
surviving banks and wreaking havoc through the economies of Italy and
the wider eurozone.
Paradoxically, the
all-or-nothing nature of the situation is Renzi’s best hope of
convincing his European interlocutors to bend the rules and allow a
bailout that doesn’t affect small savers. Enrico Letta, who
preceded Renzi as prime minister and now heads the Delors Institute,
a Paris-based think tank, describes this act of political jiu-jitsu
thus: In this troubled period for the EU, “Europe can afford
everything apart from worst case scenarios becoming real.”
So far, the noises
coming from the European Commission’s Directorate-General on
Competition, where Italian and Commission officials are arguing over
the application of the EU’s state aid rules, have been positive if
inconclusive. In theory, the EU regulation — in this case, the Bank
Recovery and Resolution Directive (BRRD) — is fairly rigid: State
funds to help banks can only be deployed after shareholders and
bondholders bear the pain. To be precise, up to 8 percent of a bank’s
liabilities has to be wiped out before any taxpayers’ funds reach
its coffers, a procedure known to financial nerds as a “bail-in.”
What makes that
process so politically toxic is that an ill-fated sales campaign by
banks means that the affected bonds, and similar financial products,
now account for about 10 percent of all the financial holdings of
retail investors, according to the Bank of Italy’s latest estimate.
Indeed, some 46 percent of the debt that would be written off in a
bail-in is held by Italian families, according to Giuseppe Lusignani,
deputy chairman of Prometeia, a consultancy specializing in the
banking sector.
These mom-and-pop
bondholders include small-scale savers like Roberta Gaini, a mother
of two from the town of Vitolini, not far from Florence, who lost
€60,000 when Banca Etruria, a much smaller bank, was rescued under
a similar scheme. Gaini’s mother and sister lost another €40,000.
“The day after the bail-in, I went to the branch and asked for
updates,” she says. “The director printed off my bank statement,
and that’s when I learned all my assets had been written off.”
Gaini says that
neither she nor anybody else in her family were informed that their
savings could be suddenly wiped out. Vitolini is a town of about 800
people, with just one bank branch. She knew the bank director well.
“We trusted those people, they were born and raised in our town.”
she says. “But they told us not to worry. They never told us there
was a risk.”
Bailing-in MPS would
mean replicating Gaini’s pain on a vastly larger scale and almost
certainly consigning Renzi to the political dustbin. The sheer size
of Italy’s retail army makes them untouchable in any bail-in. In
the words of a high-ranking Italian official, if Renzi penalizes
them, “he is politically dead an hour later.”
Frenemies
So far, Renzi has
played offense, at least publicly. Italian officials argue that other
countries — including Germany — have used billions of EU funds to
recapitalize their banks in recent years and that Italy is having a
tough time only because the latest provisions of BRRD came into force
this year. European officials counter that banks like MPS have been
zombies for years and that Renzi should have grasped the nettle and
faced the consequences much earlier on.
The European Court
of Justice bolstered the Commission’s stance on bail-ins with its
ruling on Tuesday on a government-led bank rescue in Slovenia in
2013. In that case, the EU’s top court said the Commission was
right to require “burden-sharing by shareholders and subordinated
creditors as a prerequisite for the authorization … of state aid to
a bank with a shortfall.”
In public, the
Italian PM has been characteristically unrepentant. In an interview
with Il Corriere della Sera, Renzi tried to change the subject,
saying he was more worried about the derivatives exposure of European
financial groups. That was a thinly veiled allusion to the financial
fragility of Deutsche Bank, the huge German lender. Others, like the
German Green MEP Sven Giegold, have hinted that Germany may be
willing to compromise because large German institutions hold MPS
bonds.
Fortunately for the
demolition man, no EU rule is really as strict as it seems. Upon
close scrutiny, Italy has a few cards to play, ranging from the
creation of a “bad bank” — restoring confidence by isolating
MPS’ worse liabilities — to a bail-in, but with some compensation
for retail investors.
The banking
regulation provides for some flexibility when the aid is needed “to
remedy a serious disturbance in the economy of a member state and
preserve financial stability.” Indeed, it was the financial market
turmoil that followed the Brexit vote on June 23 that first prompted
Renzi to bring up the issue of a state rescue of Italian banks, a
move seen by supporters as a masterstroke and by detractors as
cynical opportunism.
“I see the
risk that Europe will not manage to save Renzi from the political
costs” of a banking rescue, says David Allegranti, a Renzi
biographer.
To get any sort of
deal, Renzi will have to get the approval, or the benign neglect, of
its frenemy Germany. The two countries have been working together on
thorny issues such as the migration crisis and the future of the EU
after Brexit. But they have also locked horns repeatedly in the past
few months, including a bitter fight over a pan-European banking
deposit scheme.
Wolfgang Schäuble,
the tough-minded German finance minister, has advocated taking a
similarly intransigent stance on the Italian rescue, as has Jeroen
Dijsselbloem, his Dutch counterpart who heads the Eurogroup of
eurozone finance ministers. Renzi has made matters worse by often
pointing out to the domestic gallery his unusually tough stance
against the EU’s most powerful country.
For Germany, the
main lesson of the eurozone debt crisis — which began in Greece in
late 2009 and nearly led the common currency area to unravel — is
that members of the bloc must be forced to respect its rules. When
Greece was up against the ropes, German Chancellor Angela Merkel
could have lifted some of the European pressure to help the country’s
center-right remain in power and keep the leftists at bay. But she
didn’t. And after years of uncertainty, that tough strategy broke
the will of the leftist government and delivered most of what Germany
wanted.
The bail-in
requirements were central to Merkel’s efforts to sell the eurozone
bailouts to skeptical German taxpayers. Which is why she can’t
simply look the other way as Italy provides the system’s first test
case.
And yet, even the
Germans recognize that the aim of the reforms was not to punish
small-scale savers, but to prevent well-heeled investors from
avoiding the risk associated with bank bonds. And, Italy is also
unique in the eurozone for the proportion of bank debt held by retail
investors, so fudging the rules would not necessarily set a dangerous
precedent.
Which is why, while
Merkel will insist that the bail-in rules be observed — at least in
spirit — she will likely remain open to some kind of
sleight-of-hand to protect the small shareholders, especially if she
can exact something out of Renzi in return — be it on the deposit
insurance scheme or on the myriad of other measures currently on the
table of member countries and the Commission.
“What we’re
likely to see is some form of bail-in light to compensate the small
investors,” says Carsten Brzeski, chief Germany economist at ING.
“For Merkel, the key will be to convince the German public that no
taxpayer money is at risk.”
Trouble ahead
Even if Renzi
successfully navigates the corridors of European power, his problems
will be far from over. Brussels and Berlin may be able to cook up an
acceptable fudge to allow a state bailout of Italian lenders, but
there’s little they can do to organize a political bailout of Renzi
from the clutches of the 5Star Movement. Any use of public money, in
whatever form, to save MPS — a bank that has historically been
considered very close to his party — will expose Renzi to political
attacks.
“I see the risk
that Europe will not manage to save Renzi from the political costs”
of a banking rescue, says David Allegranti, who wrote “Il
Rottamatore,” a biography of Renzi, and who has been following him
since his beginnings in the hotbed of local Tuscan politics.
As Renzi sweats, his
rivals are, literally, partying. On July 6, Luigi Di Maio, the 5Star
Movement’s most likely prime ministerial candidate, celebrated his
birthday at a lavish bash on a river barge on the Tiber River,
complete with vegan cake and — as the Italian press put it — his
“sexy girlfriend.”
He was turning 30,
and he looked every bit like a shiny new broom.
Matthew Karnitschnig
in Berlin and Florian Eder in Brussels contributed reporting to this
article.
Sem comentários:
Enviar um comentário