Why have house prices in Italy continued to fall?

One of the features of these times is that economic policy is pretty much invariably house price friendly. Not only have central banks around the world slashed official interest-rates thereby reducing variable mortgage rates but many followed this up with Quantitative Easing bond buying which pushed fixed-rate mortgages (even) lower as well. If that was not enough some of the liquidity created by the QE era was invested in capital cities around the globe by investors looking to spread their risks. In addition we saw various credit easing programmes which were designed to refloat even zombie banks and get them back lending again. In my country this type of credit easing was called the Funding for Lending Scheme which did so by claiming to boost business lending but in reality boosted the mortgage market. Looked at like that we see policies which could not have been much more house price friendly.

If we switch to the Euro area we see that this went as far as the ECB declaring a negative deposit rate ( -0.4%) which it still has in spite of these better economic times and a balance sheet totaling 4.5 trillion Euros. This has led to house price recoveries and in particular in two of the countries which had symbolised a troubled housing market which were of course Ireland and Spain. But intriguingly one country has missed out as we were reminded of only yesterday.

The Italian Difference

Yesterday morning the official statistics body Istat told us this.

According to preliminary estimates, in the third quarter of 2017: the House Price Index (see Italian IPAB) decreased by 0.5% compared with the previous quarter and by
0.8% in comparison to the same quarter of the previous year (it was -0.2% in the second quarter of 2017);

The breakdown shows a small nudge higher for new properties that in aggregate is weaker than the fall in price for exisiting properties.

prices of new dwellings increased by 0.3% compared to the previous quarter and by 0.6% with respect to
the third quarter of 2016 (up from +0.3% observed in the second quarter); prices of existing dwellings
decreased by 0.7% compared to the previous quarter and by 1.3% with respect to the same quarter of the
previous year.

Property owners in Italy may be a little jealous of those in Amsterdam who have just seen a 13.5% rise in house prices in the past year.

A ( space) oddity

The situation gets more curious if we note that as discussed earlier the mortgage market has got more favourable. In terms of credit then there should be more around as at the aggregate level the ECB has expanded its balance sheet and we know that Italian banks took part in this at times on a large scale. Whilst the overall process has been an Italian style shambles there have (finally) been some bank bailouts or rather hybrid bailin/outs.

If we move from credit supply to price we see that mortgage rates have been falling in Italy. The website Statista tells us that the 3.68% of the opening of 2013 was replaced by 2.1% at the half-way point of 2017. The fall was not in a straight line but is a clear fall. Another way of putting this is to use the composite mortgage rate of the Bnak of Italy. When ECB President gave his “Whatever it takes ( to save the Euro speech)” in July 2012 it might also have been save Italian house prices as the mortgage rate fell from 3.95% then to 1.98% as of last November so in essence halved.

So if we apply the play book house prices should been rallying in Italy and maybe strongly.

House Price Slump

Reality is however very different as the data in fact shows annual falls. For example 4.4% in 2014 and 2.6% in 2015 and 0.8% in 2016. Indeed if we look for some perspective in the credit crunch era we see the Financial Times reporting this.

In real terms, Italy’s real house prices have been falling consistently since 2007 and are now 23 per cent lower — a drop that has brought the construction and property sectors to their knees.

If we look back to the credit crunch impact and then the Euro area crisis which then gave Italy a double-whammy hit then we see that lower house prices are covered by Radiohead.

No alarms and no surprises

Although existing property owners may be singing along to the next part of the lyric.

let me out of here

What is more surprising is the fact that the economic improvement has had such a different impact on house prices in Italy compared to its Euro area peers.

Italy was the only country in the EU where house prices contracted in the second quarter of last year, according to the latest figures from Eurostat, the EU statistics agency. In contrast, almost two-thirds of EU countries are reporting house price growth of more than 5 per cent. ( FT )

If we look at the house price index we see that as of the third quarter of last year it was at 98.6 compared to the 100 of 2015. So just as Mario Draghi and the ECB were “pumping up” monetary policy house prices in Italy were doing not much and if anything drifting lower. Looking further back we see that the index was 116.3 in 2010 so it has not been a good period of time for property owners in Italy and that does matter because of this.

and in a country where more than 72 per cent of households own their own home

I have to confess I was not previously aware of what a property owning nation Italy is.

The banks

We have looked many times at the troubled banking sector in Italy and we have seen from the numbers above that the property market and the banking sector have been clutching each other tightly in the credit crunch era. Maybe this is at least part of the reason why the Italian establishment has dithered so much over the banking bailouts required as it waited for a bottom which so far has not arrived. This has left the Italian banking sector with 173.1 billion Euros of bad loans sitting on their balance sheets.

Property now accounts for more corporate bad loans than any other sector: 42 per cent compared with 29 per cent in 2011………And for property-related lending the proportion of loans turning bad has been twice as high as in the manufacturing sector, weighing on banks’ €173bn of bad debts. ( FT)

So something of a death spiral as one zombie sector feeds off another as this reply to me indicates.

The trend is getting better for Italian house market but it is a vicious circle: banks’ sales of repossessed property is also contributing to the prolonged house price contraction. The number of real estate units sold via auction increased 25 % in the last 2 years ( @Raff_Perf )

As The Cranberries would say “Zombie, zombie,zombie”

Disposing of bad property loans has also been slower than for other sectors……… In contrast, banks continue to harbour hopes of greater recovery of secured loans to construction and real estate companies. As a result, this lending has remained in limbo for longer.

Another forward guidance fail?


One way of looking at Italy right now is of a property owning democracy which has had a sustained fall in house prices. This of course adds to the fact that on an individual basis economic output or GDP has fallen in the Euro area as output stagnated but the population rose meaning the net fall must now be around 5%. It is hard not to wonder if the “Whatever it takes” speech of Mario Draghi was not at least partly driven by rising mortgage rates in Italy ( pre his speech they went over 4%) and falling house prices in his home country. Along the way it is not only the banking sector which is affected.

Construction has almost halved from its pre-crisis level. ( FT)

That puts the UK’s construction problem I looked ta yesterday into perspective doesn’t it?

Looking ahead we see a better economic situation for Italy as it has returned to economic growth. What this has done if we look at annual house price numbers is slowed the decline but not yet caused any rises. In some ways this is welcome as first time buyers will no doubt be grateful that they have not seen the rises for example seen in much of my home country but if with all the monetary policy effort the results are what they are what happens when the next recession turns up?

Still if you want the bill pill Matrix style there is this from AURA who call themselves real estate experts.

“I would say it’s a mathematical fact: house prices cannot drop more than 30%. I believe that this drop of values is over and it’s now time to buy”. Stefano Rossini, Ceo for MutuiSuperket.it,

Perhaps he has never been to Ireland or more curiously Spain.

Me on Core Finance






The problems of the banks of Italy part 101

It is time to look again at a topic which is a saga of rinse and repeat. Okay I am not sure it is part 101 but it certainly feels like a never-ending story. Let us remind ourselves that the hands of the current President of the ECB ( European Central Bank) Mario Draghi are all over this situation. Why? Well let me hand you over to the ECB itself on his career so far.

1997-1998: Chair of the Committee set up to revise Italy’s corporate and financial legislation and to draft the law that governs Italian financial markets (also known as the “Draghi Law”)

It is a bit awkward to deny responsibility for the set of laws which bear you name! This happened during the period ( 1991-2001) that Mario was Director General of the Italian Treasury. After a period at the Vampire Squid ( Goldman Sachs) there was further career progression.

2006-October 2011Governor, Banca d’Italia

There were also questions about the close relationship and dealings between the Italian Treasury and the Vampire Squid over currency swaps.


But with Mario linking the Bank of Italy and the ECB via his various roles the latest spat in the banking crisis saga must be more than an embarrassment.

The inspection at Banca Popolare di Vicenza that began in 2015 was launched at the request of the Bank of Italy and was conducted by Bank of Italy personnel. Any subsequent decisions were not the responsibility of the Bank of Italy but of the European Central Bank, because in November 2014 Banca Popolare di Vicenza had become a ‘significant’ institution and was subject to the European Single Supervisory Mechanism (SSM). ( h/t @FerdiGiugliano )

So we can see that the Bank of Italy is trying to shift at least some of the blame for one of the troubled Veneto banks to the ECB. At this point Shaggy should be playing on its intercom system.

It wasn’t me…….It wasn’t me

An official denial

At the end of last month the Governor of the Bank of Italy gave us its Annual Report.

At the end of 2016 Italian banks’ non-performing loans, recorded in balance sheets net of write-downs, came to €173 billion or 9.4 per cent of total loans. The €350 billion figure often cited in the press refers to the nominal value of the exposures and does not take account of the losses already entered in balance sheets and is therefore not indicative of banks’ actual credit risk.

Indeed he went further.

Those held by intermediaries experiencing difficulties, which could find themselves obliged to offload them rapidly, amount to around €20 billion.

I suppose your view on this depends on whether you think that 20 billion Euros is a lot or a mere bagatelle. It makes you wonder why the problems at the Veneto banks and Monte Paschi seem to be taking so long to solve does it not?

Meanwhile he did indicate a route to what Taylor Swift might call “Trouble, trouble,trouble”.

At the current rate of growth, GDP would return to its 2007 level in the first half of the 2020s.

An economy performing as insipidly as that is bound to cause difficulties for its banks, but not so for the finances of its central bank.

The 2016 financial year closed with a net profit of €2.7 billion; after allocations to the ordinary reserve and dividends paid to the shareholders, €2.2 billion were allocated to the State, in addition to the €1.3 billion paid in taxes.

The QE era has seen a boom in the claimed profits for central banks and as you can see they will be very popular with politician’s as they hand them over cash to spend.

The ECB is pouring money in

The obvious problem with telling us everything is okay is that Governor Visco is part of the ECB which is pouring money into the Italian banks. From the Financial Times.

According to ECB data as of the end of April, Italian banks hold just over €250bn of the total long-term loans — almost a third of the total.

There is a counter argument that the situation where the Italian banks rely so much on the ECB has in fact simply kicked that poor battered can down the road.

“Some of them [Italian banks] are unprofitable even with the ECB’s cheap funding,” adds Christian Scarafia, co-head of Western European Banks at Fitch.

Fitch also observes that the TLTRO funding is tied up with Italy’s management of the non-performing loans that beset its banks. “The weak asset quality in Italy is certainly the big issue in the country and access to cheap ECB funding has meant that banks could continue to operate without having to address the asset quality problem in a more decisive manner,” says Mr Scarafia. (FT)

It was intriguing to note that the Spanish bank BBVA declared 36 million Euros of profits in April from the -0.2% interest-rate on its loans from the ECB. A good use of taxpayer backed money?

The Veneto Banks

For something that is apparently no big deal and according to Finance Minister Padoan has been “exaggerated” this keeps returning to the news as this from Reuters today shows.

Italian banks are considering assisting in a rescue of troubled lenders Popolare di Vicenza and Veneto Banca by pumping 1.2 billion euros (1.1 billion pounds) of private capital into the two regional banks, sources familiar with the matter said.

Good money after bad?

Italian banks, which have already pumped 3.4 billion euros into the two ailing rivals, had said until now that they would not stump up more money.

As you can see the ball keeps being batted between the banks, the state , and the Atlante fund which is a mostly private hybrid of bank money with some state support. Such confusion and obfuscation is usually for a good reason. A bail in has the problem of the retail depositors who were persuaded to invest in bank bonds.

Monte Paschi

On the 2nd of this month we were told that the problem had been solved and yet the saga like so many others continues on.


Seems odd if it has been solved don’t you think? Mind you according to the FT the European Banking Authourity may have found a way of keeping it out of the news.

The EBA said it would be up to supervisors to decide whether to include any bank in restructuring within the stress tests, and European Central Bank supervisors have decided not to include Monte dei Paschi, people briefed on the matter said.

So bottom place is available again.


This has certainly been more of a marathon than a sprint and in fact maybe like a 100 or 200 mile race. The Italian establishment used to boast that only 0.2% of GDP was used to bailout Italian banks but of course it is now absolutely clear that this effort to stop its national debt rising even higher allowed the banking sector to carry on in the same not very merry way. This week the environment has changed somewhat with Santander buying Banco Popular for one Euro. Although of course the capital raising of 7 billion Euros needs to be factored into the equation. I guess Unicredit has troubles enough of its own and could not reasonably go for yet another rights issue!

Me on TipTV Finance



The British and Irish Lions

I have been somewhat remiss in not wishing our players well on what is the hardest rugby tour of all which is a trip into the heart of the All Blacks. I am thoroughly enjoying it although of course we need to raise our game after a narrow win and a loss. Here’s hoping!




The economic problem that is Italy continues

Today brings the economic situation in Italy into focus as it readies itself for a ratings review. Friday the 13th may not be the most auspicious of days for that! However I should be more precise in my language as the Italian government will know as they get told 24 hours before. So as we live in a world where things leak, today will be a day where some traders will be more equal than others so take care. But there are plenty of worries around due to the fact that one of the central themes of this website which is Italy’s inability to maintain any solid rate of economic growth continues. To be more specific even in the good times it struggled to have GDP (Gross Domestic Product) growth of more than 1% per annum. This it was particularly ill-equipped to deal with the credit crunch and was left with weak economic foundations such as its banks.

Some better news

This was to be found in yesterday’s production numbers.

In November 2016 the seasonally adjusted industrial production index increased by 0.7% compared with the previous month. The percentage change of the average of the last three months with respect to the previous three months was +0.9.

The calendar adjusted industrial production index increased by 3.2% compared with November 2015

As you can see these were good numbers although not so good for economists whose expectations so often misfire. As the Financial Times pointed out there was a positive change in response to this.

Economists at Barclays have doubled their projected fourth quarter growth forecast for the eurozone’s third largest economy to…0.2 per cent…….. GDP growth is now expected to clock in at 0.2 per cent from an earlier projection of 0.1 per cent in the three months to December,

If you really want to big this up then you can say that the expected growth rate has doubled! Of course the issue is that it is so low and that even this would be a reduction on the 0.3% achieved in the third quarter of 2016. For a little more perspective imagine the outcry if a post EU vote UK had grown like that, twitter would have been broken.

The Labour Market

The data here is far from positive however as on Monday we were told this.

In November 2016, 22.775 million persons were employed, +0.1% compared with October. Unemployed were 3.089 million, +1.9% over the previous month……..unemployment rate was 11.9%, +0.2 percentage points in a month and inactivity rate was 34.8%, -0.2 percentage points over the previous month.

This is the Italian equivalent of a Achilles Heel and separates it from the general Euro area performance where the unemployment rate has been falling and is now at 9.8%. In fact it was one of only four European Union states to see an annual rise in its unemployment rate and we should make a mental note that Cyprus was another as this does not coincide with the message that the bailout was a triumph. Returning to Italy there was more bad news in the detail of the numbers.

Youth unemployment rate (aged 15-24) was 39.4%, +1.8 percentage points over October and youth unemployment ratio in the same age group was 10.6%, +0.7 percentage points in a month.

I hope these sort of numbers do not lose their ability to shock us and also note that time matters here as Italy is in danger of seeing a lost generation as well as a lost decade. So many must have no experience of what it is like to work.

Consumer Inflation

The last week or so has seen quite a few nations recording a pick-up in inflation in December so we see yet another area where Italy is different.

In December 2016, according to preliminary estimates, the Italian harmonized index of consumer prices (HICP) increased by 0.4% with respect to the previous month and by 0.5% with respect to December 2015 (from +0.1% in November 2016).

Yes there was a rise but to a much lower level and in terms of Italy’s own CPI prices fell in 2016 overall albeit by only 0.1%. So as we observe low rates of economic growth we see that Italy is in fact quite near to deflation which for me would be signaled by falling output and prices.

Italian consumers are unlikely to be keen on the rising inflation level such as it is because it was mostly fuel and food driven.

House Prices

Here is another difference as you might think that an official interest-rate of -0.4% and 1.5 trillion Euros or so of bond purchases in the Euro area would lead to house price rises. That is of course true in quite a few places but not in Italy.

In the third quarter of 2016: – the House Price Index (see Italian IPAB) increased by 0.1% compared to the previous quarter and decreased by 0.9% in comparison to the same quarter of the previous year (slightly down from -0.8 registered in the second quarter of 2016);

So not much action at all and in fact Italy has been seeing house price disinflation. The official index has done this after being set at 100 in 2010. It has gone 102.4 (2013), 100.1 (2014), 98.6 (2015) and 97.4 in the third quarter of last year.

So good for first time buyers and in many ways I think more welcome than the UK situation but surely not what the Italian President of the ECB Mario Draghi had planned.

The banks

This is a regular theme as well and I covered the Monte Paschi bailout on the 30th of December and apart from a debate as to how bad the bad loans are there is little change here. Yes the same bad loans which we were told were such great value only a couple of months or so ago. Also Unicredit is continuing with its 13 billion Euro capital raise confirming the view I expressed on Sky Business News just over 5 years ago. Eeek! Where did the time go?


We do have some news on this subject and it does raise kind of a wry smile.

UBI Banca, Italy’s fifth-largest bank by assets, has been cleared to buy for €1 the rump of three lenders rescued by the state in the latest step in Italian bank consolidation. UBI made the offer for Marche, Etruria and Carichieti to the state bank resolution fund on the condition the so-called good banks are stripped of €2.2bn in bad loans. ( Financial Times).

Oh and 1 Euro may turn out to be very expensive if you read my 30th of December post and the relationship of Finance Minister Padoan with reality and honesty.

Pier Carlo Padoan, finance minister, told lawmakers in Rome he was “convinced” the deal was good for the bank in question and confidence in the Italian banking system.

The discussion these days turns a lot to those bad loan ratios and how much of them have been dealt with. As ever there appears to be some slip-sliding-away going on.


The simplest way of looking at Italian economic performance this century is to look at economic growth and then growth per head. Sadly we see that GDP of 1555.5 billion Euros in 2000 ( 2010 prices) was replaced by a lower 1553.9 billion in Euros in 2015. But the per head or per capita performance was much worse as the population rose from 57.46 million in 2000 to 60.66 million at the end of 2015.

It is that economic reality which has weakened the banks (albeit with not a little corruption thrown in) and also led to the problems with the national debt about which we have also learned more today.

Italian General Government Debt (EUR) Nov: 2229.4B (prev 2223.8B) ( h/t @LiveSquawk )

The bond vigilante wolf is being kept from the door by the amount of bond purchases being made by the ECB.

What hope is there? Perhaps that the unofficial or unregulated economy is larger than we think. Let us hope so as Italy is a lovely country. But in contrast to Germany which I analysed on Monday the level of the Euro looks too high for Italy.




The spectre of nationalisation haunts Monte dei Paschi

As we approach Christmas and the New Year we see that there is something of a crossover between popular culture and the banking sector. What I mean by this is the way the TV series The Walking Dead seems to apply to some Italian banks and to Monte dei Paschi di Siena or BMPS in particular. As 2016 has progressed BMPS has looked more dead and less walking and this examination of its value will show us. Back on the 21st of January I used these numbers from Macrocredit as an illustration.

MontePaschi: Total capital raised since 2008: €14bn Market value today: €1.5bn

What is happening this morning well @warburg100 updates us.

UNABLE TO FIX AN OPENING PRICE. – 9.82%…….. new low 14.71 in a short deal with 143k pcs dealt.

This means that Bloomberg tells us this about the value of BMPS this morning.

The shares have dropped 87 percent this year, trimming the bank’s value to 478 million euros.

Actually if we use that latest share price and look at what Bloomberg used the value is now 431 million Euros compared to capital raised of 14 billion Euros. So whilst we should take care using a marginal price for an average concept we see that there has been value destruction on a grand scale here which has hurt ordinary people and investors badly as I will come to in a minute. But as James Mackintosh reminds us we have seen an extraordinary example of what we have labelled Fallin’ Alicia Keys style.

Monte dei Paschi now down 99.84% from all time high. Still holding out for -99.99%, if the suspensions allow it to fall enough

It is getting ever nearer.

Its bonds

As well as having equity capital banks these days increasingly issue bonds to back their capital and some of these are a type of hybrid capital especially if we note that the Euro area has bail in rules for some of them. Put simply if things go wrong you can lose your dough. There are obvious fears in the chart from @fastFT from late yesterday.


That bounce may seem hopeful but I would like you to note that the previous days closing price was 50.088 and the post bounce price was 47. 813. So it was still heavily down on the day off a closing price where half its value had gone. This is at a time which in general terms could hardly be more favourable for bonds as whilst the ECB does not buy bank bonds (yet) its deposit rate of -0.4% and purchases of well over a trillion Euros of sovereign bonds and some 50.4 billion of corporate bonds mean that it has been quite a bull market overall.

The issue of lower bond prices is where depositors and savers or the ordinary person come particularly into view. Back on the 24th of November I looked at how ordinary savers had been persuaded to invest in the share of banks in the Veneto region well here we are discussing bonds which were aimed at ordinary savers and depositors. With the value of some of these bonds halving and maybe worse to come we see that we are seeing Italy’s own version of a miss selling scandal. These bonds were badged as safe by the salesmen and women whereas they have turned out to be anything but.

This is the crux of the matter. Euro area bail in rules say that the bonds have to be hit whereas in terms of the impact on retail bondholders the Italian government feels that it needs to avoid this. Both out of justice and humanity but also out of simple politics.

What happened to Atlante?

This is the private-sector rescue vehicle. I have pointed out many times that it simply does not have enough money as in spite of it having a second cash call the demands on it are ongoing as this from Reuters yesterday shows.

Veneto Banca said in a statement Quaestio Capital, the manager of the Atlante fund, had pledged to put up 628 million euros ($655 million) by January 5 as part of a future capital increase.

In a separate statement Banca Popolare di Vicenza said the fund would pay 310 million euros into its coffers by the same date, also as part of a future capital increase.

So something of a dash for its cash seems to have been going on. Thus it could put some money into BMPS but not a lot

A run on the bank

Banks rarely survive such a thing and we have seen signs of this. Back in November the Financial Times reported this.

Monte Paschi, the world’s oldest lender, has lost €14bn — or 11 per cent — of its deposits since January, with an acceleration in July and August

Yesterday BMPS reported that it only had 4 months of liquidity left which is the sort of statement likely to make it 4 weeks or even 4 days! Some care is needed amongst the scaremongering as there is deposit protection up to 100,000 Euros and the Bank of Italy will be watching this like a hawk but larger depositors if there are any left are likely to move on.


Italy has had a parliamentary vote to raise “up to” 20 billion Euros which means that we will have to update the meaning of “up to” in my financial lexicon for these times. So the cash is ready and the deadline for the private-sector plans is 2 pm today. Christmas is a convenient time for such things as the public holidays can be used and it seems to be after Banif and Novo Banco a time that the Euro area prefers for such things. Or as @Swedes2Turnips1 put it.

Jingle bails.

The private rescue has failed to find anyone silly enough to back the 4 billion Euros of financial engineering with 1 billion Euros of equity. So the state is revving up although there are odd stories about the 4% stake of the state being raised to 70%. That is the sort of mistake the UK made with Royal Bank of Scotland when it is much better, if you have to invest, to also have the complete control that 100% provides. For example it is not a nice thing to happen but after a nationalisation the share price should be zero.

Spanish banks

The good day to bury bad news klaxon was in operation yesterday as this was announced.

Spanish banks, including Banco Popular Espanol SA and Banco Bilbao Vizcaya Argentaria SA, may have to give back billions of euros to mortgage customers after a final ruling by the European Union’s top court. Bank shares tumbled by as much as 10 percent. (Bloomberg)

How much?

The Bank of Spain estimates the maximum amount of mortgage floors affected by the ruling is slightly above 4 billion euros, an official said.

So we see new rules for tossing a coin where heads means the banks win and tails mean we lose. Meanwhile more disinformation is provided.

The ruling doesn’t affect Banco Popular’s solvency or strength, a spokeswoman for the lender said. The total impact of the ruling for the bank is 639 million euros and the bank has already provisioned to cover 305 million euros, she said.


This looks set to be the latest example of privatisation of profits and socialisation of losses from the banking sector otherwise known as the precious. Also the delay and dithering means that those responsible continue to collect their pay cheques and sometimes bonuses for as long as possible. The official time line has been provided for us by @Darlington_Dick



Oh and he was on CNBC in September.

Bailout for Italian banks has been ‘absolutely’ ruled out

Meanwhile please never take investment advice from former Prime Minister Matteo Renzi as he was to be found stating back in January that BMPS was a good investment. Also let me remind you that the President of the ECB Mario Draghi has been intimately involved in all of this over time via his past roles as Governor of the Bank of Italy and more as I pointed out on January 21st.

If we look further back in time we see that the law covering Italian financial markets is often called the Draghi Law and we note that around the turn of the century he was Director General of the Italian Treasury. Then he went to Goldman Sachs which was busy designing derivatives for Italy and Monte Paschi as well as Greece before returning to head the Bank of Italy. So if there is a crime his fingerprints are all over it.

Meanwhile for Italy itself there is the issue of its national debt which is already 2.22 trillion Euros and seems set to rise which reminds me of point 11 of my time line for a bank collapse.

11. It is announced that due to difficult financial times public spending needs to be trimmed and taxes such as Value Added Tax need to be raised. It is also announced that nobody could possibly have forseen this and that nobody is to blame apart from some irresponsible rumour mongers who are the equivalent of terrorists. A new law is mooted to help stop such financial terrorism from ever happening again.


Why are banks still being bailed out in 2016?

One of the features of the early stages of the credit crunch was the various bank bailouts around the world. We then got another wave as the Euro area crisis hit home. However we were then told we would be advancing into a new era except they have never really gone away. For example in my country the UK there was promises that a profit would be made and that there would be bank reform to stop this happening again. Instead we find that the reform is always being watered down and is also always just around the corner. As to a profit well Royal Bank of Scotland cost around £5 per share to the UK taxpayer compared to the current share price of £2.27 which is quite an achievement when you consider that the FTSE 100 equity index is within striking distance of 7000.


We have seen another example of how the “precious” is always protected this morning already from Ukraine. From the National Bank of Ukraine.

At its meeting held on 18 December 2016, the Cabinet of Ministers of Ukraine approved a decision on state participation in the recapitalization of PrivatBank PJSC. In accordance with this decision, 100% of the bank’s shares will be held by the state represented by the Ministry of Finance of Ukraine. This move will ensure the security of funds and savings deposits placed with this Bank, help avert systemic risks to the banking system and will pave the way for preserving financial stability in the country.


This decision will enable the protection of over 20 million Ukrainian citizens that use services provided by this Bank and hold their funds there. I primarily refer to 3.2 million pensioners and 1.6 million socially vulnerable households. They all will have unrestricted access to their accounts.

Okay we learn something of the scale of PrivatBanks operations from that but later in the statement it is rammed home.

Given the systemic importance of the country’s largest bank, it was decided to transfer PrivatBank PJSC under control of the state.

So it was TBTF or Too Big To Fail something which was supposed to have been eliminated.as Reuters points out.

Under Western-backed banking reforms, Ukraine is meant to shut lenders that cannot meet capitalization targets, but PrivatBank is considered too big to fail.

Some more details on the back story are given here.

The state was forced to assume responsibility for the future fate of PrivatBank PJSC and its customers to prevent it from sinking into a deeper crisis. Unfortunately, the problems faced by the Bank, which have been accumulated over many years, have recently deteriorated . These problems were mainly caused by imprudent lending policy pursued by the Bank, which led to capital losses.

All rather familiar isn’t it?

Tell me lies tell me sweet little lies

That line from Fleetwood Mac comes to mind as I note that these sort of rescues are associated with if we are polite continual misrepresentation and dissembling. Only last Wednesday PrivatBank released this.

According to the bank’s press-service, in Ukraine today there is no legal concept and legal way “nationalization” of a stable running of the bank, which demonstrates the blatant “feykovye” (fakeness) relevant information distributed among the bank’s customers via SMS, instant messenger, phone calls business call centers and private media.

Of course an official denial would have put followers of my writings on immediate red alert and it took less than a week! Sadly history tells us that we can expect more of the same going forwards. Specifically we will be told the truth but in “bite-sized chunks” every now and then as that has been the pattern of not only the credit crunch era but bank bailouts from time immemorial.  The situation of this bank previously being under the control of oligarchs makes me fear that this may be worse than usual. This from Reuters poses all sorts of questions.

97 percent of its corporate loans had gone to companies linked to the bank’s shareholders.

What could go wrong?

Before we move on let me present some humour from the PrivatBank statement.

PrivatBank according to the results in 2016 ranked among the world’s best banks in The Banker’s Bank of the Year Awards in 2016 and recognized in Ukraine Bank of the Year.

Sometimes you really could not make it up.

Economic Context

Ukraine has been in the midst of an economic crisis mostly caused by the struggle with Russia which amongst other things has annexed the Crimea. Having had lunch yesterday with my mum in a pub named after the battle of Alma the only good think I can say about it is that the UK is not involved in this particular Crimean conflict. But the economy of Ukraine has been hit hard as the  World Bank reminded us in September.

The economy grew by 0.8 percent in the first half of 2016, compared to a contraction of 16 percent in the first half of 2015…….

Inflation peaked at 43.3 percent at the end of 2015 due to the considerable depreciation of the Hryvnia in 2014-2015.

As a result, real wages were down by 13 percent y/y in December 2015.

Even worse these numbers were on the back of previous economic difficulties as I pointed out on August 19th last year.

The GDP per Capita in Ukraine is equivalent to 16 percent of the world’s average. GDP per capita in Ukraine averaged 1866.79 USD from 1987 until 2014, reaching an all time high of 2826.10 USD in 1989

As you can see unlike many countries which broke away from Soviet Russia Ukraine struggled economically. There was another problem which was always going to cause trouble.

the US Dollar is a type of ersatz currency in Ukraine

Accordingly the strong US Dollar which has in fact pretty much coincided with the crisis in Ukraine must have caused all sorts of economic and banking problems.

But we move on with the background that the US $5.5 billion for this bailout is a lot of money for the Ukraine as for example it is more than a third of the IMF program.


The European Investment Bank has chosen an interesting day to be plugging this theme!

New rail tunnel is the first of €3bln wave of finance and reflects boost in EU ties ……..How many projects have we financed in ? Which sectors have already benefited from an EIB loan? Find out here

Italy and Monte Paschi

We arrive here from two sources of news. Firstly if you look at the main Investor Relations page for PrivatBank you are told it has subsidiaries in Latvia,Portugal, Cyprus and Italy. Of course it has I hear you thinking! Actually the Italian subsidiary appears to be going through a liquidation process. This must be somewhat of a distraction for the Bank of Italy as it mulls this and limbers up in case it is needed. From Bloomberg.

Banca Monte dei Paschi di Siena SpA will begin taking orders for shares Monday as it aims to complete raising 5 billion euros ($5.2 billion) by the end of the year to avoid a rescue by the Italian government.

I have two main thoughts for you. The timing is significant as it will allow the Italian authorities to bail it in or out over the holidays. Although of course the holiday feeling went very wrong for the Bank of Portugal when it tried some financial engineering with Novo Banco. Also we have the issue of what has happened if this goes through as in better pre Italian referendum days only about 1 billion Euros was offered.


There is something of an irony here as I think it would be sensible for my country to fully nationalise RBS. This is not because I am a fan of such things but simply that it would be a more honest reflection on where we stand. However some 9 years after all this began it is a sorry tale that we see banks still being nationalised and others seemingly on the verge of it. Meanwhile the reform rhetoric bumbles on and employs quite a few bureaucrats and establishment barnacles on its way.

Meanwhile I note that as part of its reform program the IMF is on well trod ground for it as it criticises the pension scheme in Ukraine. This made me wonder if anyone has researched the IMF pension entitlements?


Here is a link to my August 19th 2015 analysis of Ukraine






Of Monte Paschi, Mario Draghi and the ECB

Today let us turn our attention to the long-running theme which is the Italian banking sector and in particular Banca Monte dei Paschi di Siena (BMPS) the world’s oldest bank. There was always going to be action post the Italian referendum actually whichever way the vote went but in particular with a no vote. This morning our favourite penny stock has been giving us an example of this as highlighted below by the Financial Times.

Care is needed with the chart as the old Y axis trick is at stake and misses past vastly larger falls in the share price of BMPS. But let us examine the news which has brought us here. Reuters was on the case yesterday afternoon.

The Italian treasury is considering raising its stake in Monte dei Paschi di Siena (MI:BMPS) to help the ailing lender remain in business by buying subordinated debt held by retail investors and converting it into equity, two sources with knowledge of the matter said.

The classic leak to see what the reaction is, trial balloon! Is there an Italian version of Yes Prime Minister? After all such a move would be against Euro area banking rules. It would also be something of an electoral bribe as the retail investors who bought bank debt stock ( what could go wrong?) get the equivalent of the PPI payouts in the UK, although the difference would be that the Italian taxpayer was explicitly paying for it.

On top of that the treasury would buy junior debt held by retail investors to ensure they do not suffer any losses, one of the sources said.

A second source within Italy’s government confirmed the plan. Some 40,000 retail investors hold around 2 billion euros of the Tuscan bank’s junior bonds.

This morning

The written equivalent of rhetoric has gained pace according to La Stampa via Google Translate.

But the only rescue of Siena would be like closing a hole in a tank full of holes. The decree to which the Treasury works worth far more than the three-five billion invoked the market for Siena, and at the moment does not provide for the direct intervention of the state, but that of Europe through the bottom Save-States ESM. The dancing figure indicated by two concordant sources of the Treasury is 15 billion euro.

I did enjoy “like closing a hole in a tank full of holes” as a description of BMPS and wonder what the Italian phrase is for this? Also there is a problem with using the ESM.

The ESM funds are formally a loan and therefore involve the signing of an agreement with Europe which requires those in technical jargon are called “conditionality.”

So what was called the Troika until that came to be debased and is now called the institutions ( a bit like the leaky Windscale nuclear reprocessing plant in the UK became leak-fee Sellafield) would be setting rules for Italy. Although them being applied seems unlikely with La Stampa pointing out that Spain applied them in theory rather than in practice. The other main issue is that Euro area banking rules have changed and now require bail-ins rather than bailouts although of course even the “rules-based organisation” the ECB has bypassed a few rules in its time.

How did we get here?

The meeting on Monday for the 5 billion Euro debt for equity swap does not seem to have got anyone to put their hands in their wallets or purses. I can’t say I blame them.

The time line of a banking bailout

I have posted this several times before but it seems appropriate to give it another airing.

1. The Board issues a statement accusing bloggers of spreading both irresponsible and factually incorrect rumours as the bank is sound and has no need of new capital.

2. The Bank issues a statement of confidence in its management.

3. The Bank tries to raise more private capital in spite of it having no need for it.

4. If this does not work the relevant government(s) express(es) complete confidence in the bank and tell us that it has a sound management structure and business model. Indeed the bank had only recently been giving the government advice as to how to run the public-sector more efficiently.

5. The relevant government(s) tell us that they are stepping in to help the bank but the problems are both minor and short-term and are of no public concern.

6. The relevant government(s) tell us that the bank needs taxpayer support but through clever use of special purpose vehicles there will be no cost and indeed a profit is virtually certain.

7.Part-nationalisation of the bank is announced and taxpayers are told that a profit will result from this sound and wise investment.

8. Full nationalisation is announced to the sound of teeth being pulled without any anaesthetic.

9. Debt costs of the relevant sovereign nation or nations rise.

10. Consequently that nation finds that its credit rating is downgraded.

11. It is announced that due to difficult financial times public spending needs to be trimmed and taxes such as Value Added Tax need to be raised. It is also announced that nobody could possibly have forseen this and that nobody is to blame apart from some irresponsible rumour mongers who are the equivalent of terrorists. A new law is mooted to help stop such financial terrorism from ever happening again.

12. Some members of the press inform us that bank directors were both “able and skilled” and that none of the blame can possibly be put down to them as they get a new highly paid job elsewhere.

13. Former bank directors often leave the new job due to “unforseen difficulties”.

We seem to find ourselves at point 7 although I must warn you that point 8 can then arrive faster than Usain Bolt.

Enter Mario Draghi

The President of the European Central Bank has been involved in this issue for years and indeed decades as I pointed out on the 21st of January.

If we look further back in time we see that the law covering Italian financial markets is often called the Draghi Law and we note that around the turn of the century he was Director General of the Italian Treasury. Then he went to Goldman Sachs which was busy designing derivatives for Italy and Monte Paschi as well as Greece before returning to head the Bank of Italy. So if there is a crime his fingerprints are all over it.

Of course Mario issued his “everything it takes” speech in the summer of 2012 which was explicitly for the Euro but also has implicitly helped the Italian banks. For example the sovereign bond buying of its QE program has given profits to their large holdings of Italian government debt. The purchases of mortgage debt must have helped their mortgage books as well. Yet in spite of this we are where we are.

Actually he went further before the referendum when he promised to step-up purchases of Italian government bonds should the vote be no. So my argument against Italy going to the ESM would be that it could issue the debt itself very cheaply with Mario’s bond buyers hovering in the background and maybe foreground. Awkward though if his bond buying allows Italy to break the new ECB driven bank bail in rules. After all he keeps telling us that the ECB is a “rules based organisation”.

I expect him to announce tomorrow that the ECB programs will not end in March and give us something along the lines of  a 6 month extension. His committees well report but have lost a lot of their modus operandi with the post Trump rise in bond yields although there is still the “safe haven” issue of Germany’s 2 year debt being issued today at -0.71%.


This has been a very long-running saga but one of my markers is back in play.

Italy is not preparing a request for a loan from the European Stability Mechanism (ESM) to support its banking sector, a Treasury spokesman said on Wednesday, denying a newspaper report.

Never believe anything until it is officially denied!

Of course the media produce all sorts of stories as we see in the world of football transfers where all sorts of inflated numbers appear as click bait. But some of them like Paul Pogba to Manchester United do happen. This is where we find ourselves as for example saying this makes Italy insolvent is not quite true. The QE dam of Mario Draghi holds back that flood for now and maybe “To Infinity! And Beyond” so point 9 of my banking timeline may be skipped. However without QE Italy would face solvency questions which a bank bailout would merely add to.

I bet they now wish they had like used the ESM in 2012 like Spain did.

Number Crunching

For BMPS from here on the 21st of January.

MontePaschi: Total capital raised since 2008: €14bn Market value today: €1.5bn ( h/t Macrocredit )

For Italy from Istat earlier.

The unemployment rate remained stable for the fourth consecutive quarter in comparison to the previous quarter and up 0.4 points from the same quarter of 2015, with a growth rate of 132 thousand unemployed.

Not much sign of any recovery there…

Time for The Italian Job?

In a year of events which were seemingly considered unexpected and at times unthinkable by the establishment we now face another role of the dice. This comes over the weekend in Italy. There is an irony that on the face of it the issues are domestic ones. As the Guardian describes below.

A series of major changes to the Italian political system. These reforms, which affect a third of the Italian constitution, have already been approved by parliament but by a slim margin, thus requiring that they also be passed by referendum……Under the proposed reforms, the Senate would lose almost all its power – the number of senators would be reduced from 315 to 100, and the remaining senators would no longer be elected directly.

The idea is to speed up legislation by in essence going from 2 political chambers to one to stop this sort of thing happening.

his means, put simply, that it can take a very long time for things to get done. For example, a law to give children born out-of-wedlock the same rights as children of married couples took nearly 1,300 days to be approved.

How very Italian! Which is of course part of Italy’s charm and also part of the problem. Another sign of this being Italy is that apparent reform involves creating an unelected second chamber. But the fundamental issue is that as so often happens the question on the ballot paper has morphed into becoming something of a vote on Prime Minister Renzi himself. Not perhaps the best plan when anti-establishment forces seem to have the upper hand. But as ever I will leave the political debate alone.

The economics

I recall that the appointment of Prime Minister Renzi was claimed as a new dawn for Italy and that his reforms would lead to much better economic growth. I remember asking supporters what changes were about to happen? If we look at yesterday’s update some 2 and a bit years down the road there seems to be little sign of progress.

In the third quarter of 2016 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) increased by 0.3 per cent with respect to the second quarter of 2016 and by 1.0 per cent in comparison with the third quarter of 2015.

The progress that there has been sees annual economic growth at 1% as opposed to 0.3%. So higher but of course feeds right into my theme that Italy struggles to get its economic growth rate above 1% in the good times. Are these good times? Well ECB President Mario Draghi keeps telling us that it is the negative interest-rates and QE bond buying of the ECB which has pushed economic growth higher. Also this has been a phase of a lower price for crude oil and indeed other commodities which should also have boosted the Italian economy. As per yesterday’s article that may be fading but as we look back it has certainly been in play.

Actually Mario Draghi may have been thinking of his home country when he said this in Wednesday.

Without concerted effort on structural reforms, per capita income growth in euro area is likely to stagnate or even decline

Per capita GDP has fallen by around 6% since it joined the Euro by my calculations. Whereas he is pointing out he things others have made ch-ch-changes.

Reforms in Spain in mid-2012 are example of a structural reform that has been successful in unblocking the labour market.

What country was he thinking of as a comparison with Spain here as he is interviwed by El Pais?

It is also true that Spain enacted reforms and repaired its financial sector earlier than others, which has proved crucial.

Every ECB meeting there is a part of Mario Draghi’s speech which is as nailed on as say Sergio Parisse in the Italian rugby team. It calls for structural reforms and is an example of rinse and repeat.

The banks

Last weekend the Financial Times shifted towards panic mode.

Up to eight of Italy’s troubled banks risk failing if prime minister Matteo Renzi loses a constitutional referendum next weekend and ensuing market turbulence deters investors from recapitalising them, officials and senior bankers say.

I guess you are wondering which 8?

Italy has eight banks known to be in various stages of distress: its third largest by assets, Monte dei Paschi di Siena, mid-sized banks Popolare di Vicenza, Veneto Banca and Carige, and four small banks rescued last year: Banca Etruria, CariChieti, Banca delle Marche, and CariFerrara.

Not Unicredit? That would make nine like say the Nazgul.

Monte Paschi

Let us stick with the world’s oldest bank for as moment and there is maybe a saviour on the horizon. From @creditmacro.

MontePaschi may sign preliminary investment agreement with Qatar Investment Authority between Saturday and Monday, Il Sole 24 Ore reports.

Mind you to that ying there is also a yang as Reuters have just reported.

Italy is discussing with the European Commission the terms of a state bailout of ailing bank Monte dei Paschi (BMPS.MI) that has already been requested and could be launched next week if needed, Italian daily Corriere della Sera reported on Friday.

Italy’s third-largest bank needs to raise 5 billion euros ($5.3 billion) by the end of the year to plug a capital shortfall identified by European Central Bank stress tests or face the risk of being wound down.

Care is needed as we have “may” on one side and “could be” on the other. But we do at least have an official denial and we know what they mean! From @livesquawk.

Italian Govt Undersecretary: MontePaschi Will Not Need State Help – ANSA

Anyway the Bank of Italy is dreaming of the future as it let is know on Wednesday.

The Bank of Italy has identified the UniCredit, Intesa Sanpaolo and Monte dei Paschi di Siena banking groups as other systemically important institutions (O-SIIs) authorized to operate in Italy in 2017. The three groups will have to maintain a capital buffer for the O-SIIs of 1.00, 0.75 and 0.25 per cent respectively of their total risk exposure, to be achieved within four years according to the transitional period shown in Table 1.

So SII has replaced SIGI which replaced TBTF ( Too Big To fail) as we go acronym crazy. Do I have that right?

Oh and if you are systemically important should they not all have the same thresholds?


We find ourselves facing for the first time in 2016 an event where this time the “shock” result is the expected one. Accordingly financial markets should have made much of their adjustment already. Although on the face of it I find it is hard to see much insurance in an Italian two-year government bond yielding 0.22% or indeed a five-year one yielding 0.89%. But perhaps as Reuters reports Mario Draghi has a put option ready for them.

The European Central Bank is ready to temporarily step up purchases of Italian government bonds if the result of a crucial referendum on Sunday sharply drives up borrowing costs for the euro zone’s largest debtor, central bank sources told Reuters.

Ah that word “temporarily” again! Those most annoyed by this should be the Portuguese who have much higher bond yields but by contrast have seen fewer bond purchases than their theoretical share.

As for the Euro it has drifted lower recently as we note an exchange-rate around 1.06 to the US Dollar and the UK Pound has regained ground to 1.18. The trade-weighted move has been from 96.1 to 94.4 so relatively minor. However looking forwards whilst there could be a knee-jerk fall surely an increase in the possibility of Italy leaving the Euro makes it more of a “hard” and “safe-haven” currency so it could later rise.

Don’t get a job involving numbers

This is from a Bank of Italy working paper on undeclared assets.

Third, it estimates the portion of tax evasion connected to the underreporting of foreign assets to range between $20 trillion and $42 billion a year over the period 2001-2013 for capital income tax,

Thanks for that!