Hamilton Crawford - Italy Backstops 2 Banks at Cost of €17Bn
Hamilton Crawford: The Italian government has revived the specter of moral hazard as it moves to bail out two failing banks.
SHANGHAI, July 10, 2017 /PRNewswire/ -- Hamilton Crawford - Nearly a decade after a global financial crisis that saw taxpayers foot the bill for bailing out banks in the US, the United Kingdom, and Europe, it appears that the notion of banks being too big to fail has been revived after the Italian government agreed to split the assets of two banks - Veneto Banca and Banca Popolare di Vicenza - into so-called "good" and "bad" banks. The banks' branches will remain open.
The good assets will be acquired by the country's largest retail bank, Intesa San Paolo which will receive a €5bn sweetener to help it digest the deal. The lenders will be liquidated and the taxpayer will cover the bill for the bad loans on both banks' balance sheets.
"After all the rhetoric from the European Central Bank and other European agencies about stamping out the moral hazard of socializing losses over the years, it's galling that the Italian government would rather put taxpayer money on the line to bail out creditors who bought these banks' debt," explained an Hamilton Crawford banking sector analyst.
The Italian government excused its actions by saying that the bailout was meant to stave off a confidence-damaging scenario in which worried savers formed long queues as they all try to withdraw their funds at the same time when the banks' branches reopened Monday.
Concerns were raised that the bailout would contravene EU rules because taxpayers are not supposed to foot the costs for the costs associated with the bailout of a failing bank but the government insisted that funds for the rescue would come from a €20bn fund established last year to help embattled lenders and, consequently, would not affect Italy's public borrowing.
"The deal appears to protect depositors and senior debtholders but there will be job losses if Intesa San Paolo decides to close branches that it cannot absorb into its existing branch network," said the Hamilton Crawford analyst.
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