What are the main lessons from the Italian bail-out of the two Veneto region’s banks ?

  • At the European level, the bail-out is a nail in the coffin of the Bank Recovery and Resolution Directive (BRRD), as it shows that European rules for protecting tax-payers can be easily circumvented. It creates a precedent that does not bode well for future banking resolutions. It raises a serious moral hazard issue for national banks and national regulators: just invoke the magic F-word, “Financial-stability”  and the EU will let tax-payers foot the bill. Do you remember the paramount objective of breaking the bank-sovereign debt loop? It’s down the drain.
  • The Government’s main justifications for allocating up to a point of GDP to the rescue and for heavily subsidizing Banca Intesa are very weak. a) Fears of contagion to other banks is hard to imagine: the 2 banks make about 2 percent of the Italian banking system’s assets, according to the FT. b) The need of fully bailing-out senior bond-holders is also hard to accept. Large private bond holders were not rescued in the case of the regional banks of Etruria, Marche, Chieti and Ferrara. It’s hard to imagine large investors being cheated by banks.  c) A credit crunch of SME’s due to the disappearance of credit lines could have been avoided by other market mechanisms such as securitization. d) A bank-run on deposits was very unlikely given the guarantees of deposits below 100 euros (but of course that may have cost the Italian banking sector an extra 12 million for guaranteeing these deposits, which were instead shouldered to tax-payers)
  • While the short-term political incentives for the Government are  clear (avoid unpopularity with small investors, depositors, small firms in the Veneto region, and Italian banks in the wake of the next elections) the main lesson from the bail-out comes from the deafening silence of all the opposition parties. Neither Berlusconi and the Northern League on the right, nor Bersani &friends on the extreme left, nor Grillo’s the 5 Star Movement criticized the government for choosing to avoid a EU-rules-based resolution. The entire Italian political spectrum has no problem with piling up another point (roughly 17 billion) to the gigantic public debt to GDP ratio. As soon as markets realize this, with QE coming to an end, the  rise in government debt’s refinancing costs may very easily swollen above 17 million.