Following the Monte Paschi (MI:BMPS)affair, when the Italian government was forced to broker a deal to keep the bank trading, the question has been when, and not if the next crisis among EU banks will appear. Speculation also continues as to who will follow suit and be required to seek assistance just to stay afloat.
Main Focus
Predictably, a lot of focus falls on Italy in the wake of the Monte Paschi crisis with a number of banks being tipped to follow their compatriots and seek a bailout arrangement. Banca Carige SPA, Banca Popolare di Vicenza SPA and Veneto Banca SPA have all been linked with crunch talks in recent press. In the case of the latter two, it’s reported that the Italian government has established plans to have contacted businessmen in the local area in an attempt to garner funds and ward off the possibility of going down the Monte Paschi route.
The banks had previously contacted the EU with a view to reducing the capital needed to secure a bailout but neither were able to prove they had a profitable future and that’s the most worrying aspect about their joint situations right now.
"The future of Banca Popolare Di Vicenza SPA and Veneto Banca is bleak because, after the acquisition of the two banks by Banca Intesa Sanpaolo (MI:ISP), thanks to the €4.8 billion financial support by the Italian Treasury, there will be a difficult transition period where the banks will be divided into a "good bank", which will be acquired by Intesa, and a "bad bank", with almost 4,000 employees to dismiss and €17.8 billion of bad loans to sell,” said Emanuele Canegrati, Chief Economist at BlackpearlFX.
It will not be an easy operation, as in Italy the inefficient bureaucracy and the lack of a deep market for NPLs make the sales at a fair value extremely difficult. The entire operation is granted by public money but the risk is due to possible legal action undertaken by shareholders and bondholders, after that, criminal activities by former administrators have been detected by magistracy. If the damage was recognized by judges, compensation to clients could be particularly high and negatively impact on the reconstruction plan. “
Regulations
EU rules in this respect are very clear and if any financial institution looks for assistance in the manner that Banca Popolare di Vicenza SPA and Veneto Banca sought help, they must be able to show the potential to be profitable in the long term.
The fact that the European Union offered no help in this situation is therefore a damning indictment of those two banks who must now seek assistance from private investors in order to bolster their chances of mere survival.
It would also suggest that Monte Paschi were viewed as sustainable by the EU but industry experts assert that this isn’t necessarily the case. In fact, history shows that the position in regards to this institution seems far from settled either. Emanuele Canegrati stated that the agreement
“Does not mean the situation is solved, since it is not the first time the bank is saved by the Italian Treasury and we know that previous bailouts all failed,”
“We have to wait until the restructuring plan is published in order to formulate a more precise judgement. Certainly, we expect a very painful plan.”
Further afield
It’s natural that the events of recent weeks have seen Italy fall under the spotlight but what about Europe as a whole? The first point to note is that any random search will show that the aggregator sites have dedicated sections for the Eurozone banking crisis and that can’t be a good sign.
Italy remains the focal point but Greece and Turkey are, amongst others, the next to receive coverage. It’s also clear that while many commentators in the UK are tired of airing the subject, the first anniversary of the Brexit vote has also made sure that the issue of Great Britain leaving the European Union continues to remain in the spotlight with fallout affecting certain institutions in Europe as a whole.
In Greece, reports were grim at the start of the year when it was reported that across the country, account holders had withdrawn a staggering £2.1 bn from banks amidst fears of widespread default. Those withdrawals came across a 45 day period with the subsequent void not exactly helping the institutions in question.
Suggestions of a potential rally shortly followed until in June 2017 as Moody’s Investor Service announced that a number of Greek banks had seen their senior debt ratings and baseline credit assessments upgraded.
The future
At the start of 2017, the focus in terms of the Eurozone crisis was on Greece and Italy while Brexit was inevitably taking up more than its fair share of headlines. But is the future really as grim as we are being led to believe?
"Fortunately, the latest data on the balance sheets of European banks show a gradual return to normality in all Eurozone countries, after the peak recorded during the big crisis sparked in 2008,” Emanuele Canegrati continued.
“Nevertheless, many countries are still in a critical situation, due to the high percentage of Non-performing loans. All these countries belong to the Mediterranean area: Cyprus, Greece, Italy, Spain and Portugal. It is possible that other cases like those of Veneto Banca and Popolare di Vicenza, saved by Banca Intesa and Banco Popular, saved by Banco Santander (MC:SAN), would happen in these 5 countries. Otherwise it is very difficult to expect that the same can happen in Northern countries, which have a much more solid business, except for very small banks which represent special cases. "
The future remains unwritten but comments from industry analysts suggest more of a balanced position than we might expect. Anyone seeking a glimpse into that future might therefore want to consider the views of the industry experts which look beyond the tabloid headlines which are almost exclusively bleak.