How will Italy cope if its economy shrinks again?

Over the past few says the Standard and Poors ratings agency has been running its slide rule over Italy and yesterday in his final press conference Mario Draghi of the ECB indulged in some trolling.

No, of course not. Things have changed completely and frankly, everybody now in Italy said and stated that the euro is irreversible. So while there may have been hypothetical doubts in one part of the governance of the country, there aren’t any more, so it’s been accepted.

I am not sure if that was a promise or a type of threat! The problem with this sort of rhetoric though had already been highlighted by Mario himself.

 Incoming economic data and survey information continue to point to moderate but positive growth in the second half of this year.

It was in the bit where he felt the need to point out that growth would be positive and was perhaps a response to this from Markit earlier that day.

The eurozone economy started the fourth quarter
mired close to stagnation, with the flash PMI
pointing to a quarterly GDP growth rate of just
under 0.1%………Optimism about future prospects deteriorated further in October to the lowest for over six years,

They had even dragged Mario into it.

The survey indicates that Mario Draghi’s tenure at
the helm of the ECB ends on a note of near-stalled
GDP, slower jobs growth, near-stagnant prices and
growing pessimism about the outlook.

As you can see they gave a different picture which was of marginal/no growth that looked set to deteriorate. Actually Mario was worried about that too if we look further down his speech.

The risks surrounding the euro area growth outlook remain on the downside. In particular, these risks pertain to the prolonged presence of uncertainties, related to geopolitical factors, rising protectionism and vulnerabilities in emerging markets.

Also whilst Markit did not give specific detail for Italy this was troubling.

The rest of the euro area saw a near-stalling of
growth, with output rising at the weakest pace since
the current upturn began in August 2013

What about Italy?

This reminds me of something from the French statistics office that I quoted on Wednesday.

Italian economic growth has remained almost non-existent for more than a year (0.0% in Q2 after +0.1% in Q1).

If you are already not growing and things are getting worse that has a clear implication and it takes us back to our “Girfriend in a coma” theme for Italy. This is where it does not fully participate in economic upswings but sadly does in downswings.

If we look at the area that causes the most concern around the world right now the Italian statistics office told us this earlier this month.

In August 2019 the seasonally adjusted industrial production index increased by 0.3% compared with the
previous month. The change of the average of the last three months with respect to the previous three
months was -0.3%.  The calendar adjusted industrial production index decreased by 1.8% compared with August 2018 (calendar working days being 21 versus 22 days in August 2018).

The manufacturing sector declined by 2.8% on a year ago and the manufacture of transport equipment fell by 6.9%.

So the pattern here was of recovery in 2015 followed by growth in 2016 and 17 but the growth slowed at the beginning of 2018 and has turned into declines. The underlying index is at 104.9 where 2015=100 so we see that the growth spurt is slip-sliding away.

The problem is that there is another catch.

The unadjusted industrial new orders index decreased by 10.0% with respect to the same month of the previous year (-4.0% in domestic market and -16.3% in non-domestic market).

This meant that the seasonal adjustment needed to do some quite heavy lifting to get us to this.

The seasonally adjusted industrial new orders index increased by 1.1% compared to July (+1.1% in domestic market and +1.0% in non-domestic market); the average of the last three months decreased by 1.6% compared to the previous three ones.

The Banks

If Italy is to change its economic path then it needs a reformed banking sector but as this from Reuters highlights we are back to the same old problems.

 Italy wants to shield Monte dei Paschi (BMPS.MI) from bad loan losses as it prepares the bailed-out bank for a sale, but faces resistance from European Union competition authorities, two sources close to the matter said.

Yep we are back to the world’s oldest bank which to link to the start of this story has operated much of this century under what are called the Draghi Laws. As ever the can is being kicked via a Special Purpose Vehicle or SPV.

Sources have told Reuters the Treasury wants to lower the impaired debt ratio to 5% by spinning off some 10 billion euros in problem loans that would be merged with the assets of Treasury-owned bad loan manager AMCO.

We find ourselves taking a trip into a type of fantasy land yet again.

Monte dei Paschi values debts unlikely to be repaid in full at just over half their nominal value and its worst performing loans at 38%.

That compares with an estimated average price of 27% of nominal value for soured loan transactions in Italy this year, a Banca IFIS report states.

How much? Well here is another way of putting it.

One of the sources said a sale would imply a 1.5 billion euro loss for Monte dei Paschi, hurting the bank’s minority shareholders but not the Treasury, which would benefit from the lower transfer price since its controls 100% of AMCO.

This is a situation that we have observed time and time again in the Italian banking crisis. This is where fantasy numbers are used to fudge the situation but sooner or later they end up facing reality. In this case it is minority shareholders in Monte Paschi who would take the punishment and remember they may well recall being told by Prime Minister Renzi that the bank was a good investment.

Fiscal Position

On Monday we got a reminder that it is not the fiscal deficits that are a problem for Italy.

The government deficit to GDP ratio decreased from 2.4% in 2017 to 2.2% in 2018. The primary surplus as a percentage of GDP was 1.5% in 2018, up by 0.2 percentage points with respect to 2017.

The government debt to GDP ratio was 134.8% at the end of 2018, up by 0.7 percentage points with respect to the end of 2017.

We have had a lot of political rhetoric about it borrowing more but overall Italy has not. The picture has been confused by Eurostat’s inability to produce seasonally adjusted numbers for Italy but the unadjusted ones are if anything lower than in 2018.

In the short-term it remains very cheap for Italy to borrow with its ten-year yield being a mere 1.01%. That is amazingly cheap in the circumstances and can only represent the expectation of being able to sell to the ECB at a higher price as there is a genuine danger of a downwards spiral in an economic slow down.

Comment

We find that the ongoing Italian economic weaknesses such as low growth in the good times and a banking sector full of zombies ready for Halloween leave it exposed to any economic downturns. It is a lovely country and on some viewings has economic strengths as the Bank of Italy reports.

Exports continued to increase in the second quarter, despite the contraction in international trade. The current account surplus rose further, to 2.8 per cent of GDP; foreign sales may have faltered in the following months.

But this leads to another fail for economics 101 as this should lead to economic dynamism except in Italy it never does.

Economic activity in Italy increased only slightly in the second quarter and, in the light of the available data, it could have remained almost stationary in the third……..There is still the risk that the unfavourable developments in industry will be transmitted to the other sectors of the economy.

Any further weakness in economic growth will put even more pressure on this.

The Government estimates net borrowing at 2.2 per cent of GDP this year, the same as in 2018. The debt-to-GDP ratio is expected to rise from 134.8 to 135.7 per cent of GDP.

So whilst I wish Mario Draghi a happy retirement it is also true that his tenure at the ECB has done little for his home country and via the way policy has been tilted towards an increasingly zombified banking sector may in fact have made things worse.

the next fact can be swung several ways.

Since 2015, the resident population has been decreasing, setting up a phase of demographic decline
for the first time in the last 90 years. At 31 December 2018 the population amounted to 60,359,546
residents, over 124 thousand less than the previous year (-0.2%) and over 400 thousand less than four
years earlier.

On the positive  side it helps GDP per person and fewer people must help the green agenda. On the negative side an ageing and shrinking population is less able to deal with the sizeable national debt.

 

 

 

 

 

 

 

What is going on with the banks of Italy?

Yesterday saw something of a familiar theme as we were told this by Fabrizio Pagani, the chief of staff at Italy’s Ministry of Economy and Finance.

*PAGANI: ITALIAN BANKS ARE DEFINITELY FIXED ( h/t @mhewson_CMC )

You would be forgiven for thinking not only what again? But also experiencing some fatigue after being told it so often. Less than twelve hours later something else that is rather familiar turned up.

PAGANI SAYS ITALIAN BANKING NEEDS CONSOLIDATION ( h/t @lemasabachthani )

So they weren’t fixed for long it would seem! According to Bloomberg who had the interview we had another hostage to fortune as well from him.

“The story of Italian non-performing loans is over,” Pagani said.

He sounds so much like Finance Minster Padoan doesn’t he? In reality even those who are friendly to such ideas have doubts.

As you can see even Spain which was criticised for acting slowly in fact was 3/4 years ahead of Italy we note that the Italian problem got worse during this period. In fact Spain is in the process of repaying the ESM ( European Stability Mechanism) the money it borrowed for this.

Spain made the request for the repayment on 30 January 2018. One repayment will be for €2 billion, and is planned for 23 February 2018. The size of the second repayment will be €3 billion, and is scheduled for May 2018.

So in total this has happened.

Between December 2012 and February 2013, the ESM disbursed €41.3 billion to the Spanish government for the recapitalisation of the country’s banking sector……….Following the two repayments, Spain’s outstanding debt to the ESM will stand at €26.7 billion.

So Spain is exiting the procedure as Italy begins it and as is so usual Italy is doing it in its own way. For example in the tweet picture above the phrase bail in is used when in fact what it has done have had the features of bailouts as well. Also is this good or simply kicking the can somewhere else?

Investors also snapped up more than 100 billion euros ($123 billion) in non-performing Italian bank loans last year, which has helped reduce the level of net bad debt across the sector by more than a third.

Some may think that this may be more like vultures on their prey.

This month, Bob Diamond and Corrado Passera, the former bosses of Barclays Plc and Intesa Sanpaolo SpA, joined forces to shop for a lender to smaller Italian companies.

Monte Paschi

It too was in the news yesterday as Bloomberg told us this.

Fabrizio Pagani, the chief of staff at Italy’s Ministry of Economy and Finance, told Bloomberg News that Monte Paschi is in the picture for mergers after taking substantial steps to clean up its balance sheet since its rescue and introduce new management practices.

Who wants to merge with a zombie? I am reminded of what my late father used to tell me which is that more than a few takeovers and mergers only exist because the muddle the figures for a year or to. I can see why the Italian state might be keen as they did this.

A sale of Monte Paschi would cap a saga that saw Italy’s third-biggest bank, an icon of national finance, become engulfed by bad debts, criminal cases, and 6.7 billion euros in losses in the last two years. The government salvaged it as part of a 8.3 billion-euro recapitalization that strained ties between the country and the European Union over bailout rules.

Italy paid some 6.49 Euros a share as opposed to the 3.18 as I type this as we mull how the “substantial steps” have been ignored by the market which has more than halved the share price? We also learnt something from its bond issue in January. From the Financial Times.

Despite the low rating, the bond sale was three times subscribed and priced at a yield of just 5.375 per cent, confirming Monte Paschi’s ability to tap markets after its 2017 recapitalisation,

“Just 5.375%”? As in Europe these days that feels like riches beyond imagination! Especially if you note this.

The Italian government will provide a guarantee to the investment grade rated senior notes in this securitisation, which Monte Paschi will “retain” on its books.

I also thought that the bailout fund Atlante was pretty much out of cash.

It is able to derecognise the non-performing loans, however, because the riskier “mezzanine” and junior notes are being sold to the Italian Recovery Fund………..
While this fund — formerly known as Atlante — is private, it is part of a government-led initiative to clean up the Italian banking sector, and has far lower return targets than typical distressed debt buyers.

Anyway the share price reflects something rather different from the rhetoric as I note that according to Il Populista our old friend Finance Minister Padoan is on the case again.

The state will remain in Mps “for a few years”. Economy Minister Pier Carlo Padoan told the unions to add that “giving a number would be wrong and counterproductive for the markets”.

Giving wrong numbers has never bothered him before as I note this description of him which may be a quirk of Google translate.

The Minister of Economy, without shame,

The ECB

Today has brought news that swings both ways for the Italian banks as we have got the data which determines the interest-rate for TLTRO II so it was not a surprise to see this.

The annual growth rate of adjusted loans to non-financial corporations increased to 3.4% in January, from 3.1% in December.

Of the new 24 billion Euros some 20 billion was for less than a year but presumably long enough to fulfil the ECB criteria with the Italian banks to the fore.

January net lending flows to the non-financial private sector were particularly strong in Germany and Italy (second largest in over 10 years). ( @fwred )

Yet so far they have gained little as the annual gain from this according to @fwred is 769 million Euros for the Spanish banks but 0 for the Italian ( Portuguese and Dutch) ones. Perhaps the last-minute dash will make a difference.

Veneto Banks

The collapse of Veneto Banca and Banca Popolare di Vicenza. last year led to many financial problems in the area. In banking terms this happened.

The two Veneto banks were wound down in June, with the state guaranteeing losses of up to €17bn, after the European Central Bank declared the lenders as failing. Intesa was handed as much as €4.8bn to help preserve its capital ratios from any adverse impact from the deal. ( FT)

Yet as this from IlFattoQuotidiano.it  in January shows the pain for many businesses and savers continues.

He finally gave up. But it took six hours of negotiation because the former Romanian bricklayer Marin Halarambie, 59, agreed to move his car from the entrance of the historic Veneto Banca headquarters in Montebelluna. Christmas Day had arrived to stage a very personal protest, as the bankruptcy of the bank cost him a loss of about 125 thousand euros.

Comment

This is a particularly Italian saga where official boasting about the lack of bank bailouts met a brick wall of bank collapses later. Even worse the problem deteriorated as they looked the other way. On this road equity investors suffered – who can forget Prime Minister Renzi telling people Monte Paschi was a good investment ? – and so did the savers who were encouraged to invest in the “safe” bank bonds.

Now the economic outlook is better we wait to see what happens next. But there is a clear distinction between my subject of yesterday the Netherlands and Italy and it is this. From January 11th.

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);

For all the machinations that have gone on Italy has so far been immune from the suggested cure seen so often elsewhere which is to make the banks mortgage assets look stronger via higher house prices. How very Italian! Still the winners here are Italian first time buyers if they can get a mortgage.

Last week Bank of Italy Deputy Governor Panetta gave a speech which in one way suggested he must know some incredibly pessimistic people.

During the financial crisis, Italy’s banking system proved much more resilient than expected by many observers.

But intriguingly he does agree with me that if the buyers of bad loans are getting a good deal this must weaken and not strengthen the banks?

A generalized sale of NPLs on the market would imply a large transfer of resources from banks to buyers.

No wonder Diamond Bob is on the case! Also this is yet again rather familiar.

While the secondary market for NPLs is showing signs of rapid growth, it is still opaque and relatively oligopolistic.

And?

Simultaneous, blanket sales would further depress
market prices, magnifying the gap between the book and market values of NPLs. The result
for banks would be significant losses and reduced capital. This could have unintended effects
on individual banks as well as macroeconomic consequences through a contraction in credit
supply in countries where high NPL stocks are a concern for several banks.

 

 

 

 

The Italian banks and how they have contributed to a possible end to deposit protection

A regular feature of recent years has been the Italian banking saga where we are continually reassured that banks are fine and then it turns out that they are not. Many of the misrepresentations have come from Finance Minister Padoan who was in fine form in January according to Politico.

Italian Finance Minister Pier Carlo Padoan has defended the way his country dealt with its banking crisis, saying the government had “only spent €3 billion” on bailouts, in an interview with Die Welt published today.

“We are the EU country that has paid the least to save its banks,” Padoan said. Out of 600 banks, only eight “have problems,” he noted, saying the “system as a whole is not in crisis,” having “withstood the financial crisis.”

Apparently this is a mere bagatelle or the Italian equivalent.

Italy’s banking system is groaning under €360 billion in bad loans,

Such is his loose association with the truth he claimed this.

“I assure you, we have no interest in state intervention,” Padoan said

whilst doing this.

The government has set aside a €20-billion fund to save banks, and is expected to provide roughly €6.7 billion of that to prop up ailing Tuscan lender Monte dei Paschi di Siena.

Oh and he had one last go at what in modern parlance is called “misspeaking”.

Everything has been done “according to European guidelines,” the finance minister added, defending the use of bail-ins, whereby creditors and depositors take a loss on their holdings to help rescue a failing bank.

Actually what was about to come drove a Challenger tank through the rules and in my opinion has contributed to potentially ominous developments for bank depositors in the Euro area. At the moment deposits up to 100,000 Euros are covered unequivocally but on the 8th of this month the European Central Bank published an opinion piece including this and the emphasis is mine.

The general exception for covered deposits and claims
under investor compensation schemes should be replaced by limited discretionary exemptions to
be granted by the competent authority in order to retain a degree of flexibility. Under that approach,
the competent authority could, for example, allow depositors to withdraw a limited amount of
deposits on a daily basis consistent with the level of protection established under the Deposit
Guarantee Schemes Directive (DGSD)34,

That has echoes of the demonetisation shambles that took place in India a year or so ago with queues around the corner for the banks. Now let us take care as the deposit protection scheme still exists as I have seen plenty of places on social media claiming it does not but there are questions about it in the future as you can see. One of my themes is in play here as we note that the ECB is much more concerned about “the precious” than the rights and maybe losses of depositors.

The ECB cautions that prolonged periods during which depositors have no access to their deposits undermine confidence in the banking system and might ultimately create risks to financial stability.

You don’t say!

Monte Paschi

Top of the list as ever is the world’s oldest bank and in terms of the terminator it’s back. From Reuters on the 25th of October.

Shares in the bank opened on Wednesday at 4.10 euros, which became the reference price for the session, and then rose to as much as 5.26 euros, up 28 percent.

That price translates to a paper loss of 1.3 billion euros for Italian taxpayers, who are set to hold 68 percent of the Tuscan bank, which was central to public and private finances in Siena and the surrounding region.

Italy’s government paid 6.49 euros a share in August, when it pumped 3.85 billion euros into Monte dei Paschi, and is spending another 1.5 billion euros to shield some of the bank’s junior bondholders, whose debt was converted into equity.

Actually since then shareholders have had a rather familiar sinking feeling as the price as I type this is 3.95 Euros as I type this. Perhaps the former Prime Minister has suggested the shares are a good buy again as of course last time in an unfortunate mistranslation that actually meant good-bye. As I pointed out last week troubles are brewing around this issue. From Reuters.

A group of bondholders challenged Italy’s rescue of ailing bank Monte dei Paschi di Siena (MI:BMPS), suing the lender over the cancellation of their investments and calling for the bonds to be reinstated.

The Italian banking enquiry looked at the state of play yesterday and there are allegations of wrong doing pretty much everywhere as losses were hidden. Indeed Germany’s banking supervisor got dragged in as there are claims it kept back information on the derivatives contracts with Deutsche Bank.

Banca Carige

Next on the list there is this from Reuters this morning.

 Italy’s Banca Carige warned that its working capital is not sufficient to satisfy its own needs for the next 12 months, the lender said in he prospectus for its imminent capital increase.

Carige also said it had not yet received the final SREP assessment by the European Central Bank, adding it could not rule out a request by the authority for additional capital strengthening measures.

The bank secured backing from core shareholders and underwriters for a vital 560 million euro cash call in a last-minute agreement signed on Friday.

Creval

Here is IlSole from Sunday via Google Translate on this subject.

A 70% collapse in less than two weeks had not been taken into account by anyone in Sondrio. Yet that is what is happening in the title of Credito Valtellinese. The Lombard bank has seen its capitalization deflating from 280 million to 95 million in a dozen sessions. And triggering sales was the announcement of the same bank to raise a 700 million capital increase.

There are obvious issues in wanting an extra 700 million Euros when your value is 280 million let alone 95 million! Anyway the share price has seen better days as it has fallen by just under 6% to 1.38 Euros as I type this.

Banca Popolare di Bari.

In a former life I used to deal with quite a few Italian banks on behalf of Deutsche Bank and am straining my memory to recall if my trip to Bari included this one. Anyway times were seemingly much better than now if this letter quoted in i due punti in September is any guide.

An important letter sent by Federconsumatori Italia to the Minister of the Economy, to the Governor of Banca d’Italia and to the President of Consob ….
It reads on the Republic signing of Antonello Cassano ” The bank has ruined our lives, we want to go back our savings. ” It is a climate of anger and despair that one breathes in the headquarters of the Banca Popolare di Bari shareholder protection committee………Investigations by the Bari Public Prosecutor’s Office describe years of irregular management, loss accounts and abnormal loans. Heavy offenses challenged at the top of Bpb, by the association for delinquency and fraud until false statements in the prospectus.

Comment

There is much to consider here as this is happening at the wrong stage in the cycle as the Italian economy has improved ( 0.5% GDP growth in the third quarter) which should be supporting the banks. Some of the non performing loans will be improving. However contrary to the boasting of Finance Minister Padoan the low bailout figure for Italy was a form of denial as problems were hidden and then ignored meaning that they got worse. A factor in this has been Italy’s problem with the size of its national debt and an aversion to adding to it.So now we find ongoing troubles instead of improvement.

Also the ongoing crisis and subversion of Euro area rules has in my view contributed to the way that the ECB is now considering changes to deposit protection. There is an irony here as its President has a past deeply entwined with all this as not only was he Governor of the Bank of Italy but there is a clue in the way that the banking regulations are called the “Draghi Laws”! Here is how he sums up the current state of play.

The other trend is the growing resilience of the financial sector.

Just for clarity in officialese banks are always resilient up to the day they collapse. But Mario is bright enough to cover himself.

Clearly this trend hides some variation among banks, which is largely driven by differences in their business models.

Can anybody think of who he might mean?

 

It is always the banks isn’t it?

Modern economic life invariably revolves around the banking sector or as it has been named “The Precious” in a nod to the Lord of the Rings saga. This is because it is inextricably linked to the supply of credit and hence money via the amount of lending they do. Today I wish to look at some ch-ch-changes which have happened this week but this comes also with another notable change from earlier this month. It came from a UK portfolio manager famous for not investing in banks.

New holdings that have resulted from this strategic shift include Lloyds Banking Group. I have often heard Neil say that banks should be viewed as warrants on economic growth. In a modern ‘fiat money’ system, banks play a pivotal role in the economy through the creation of credit. ( Woodford Funds).

Meanwhile if we remain with the UK some things have remained the same as this week saw yet more retrenchment and deleveraging.

Barclays  cut its stake in Barclays Africa Group  to 15 percent sooner than expected on Thursday, ending more than 90 years as a major presence in the continent. (Reuters)

There is something familiar here though as we look at the result of a bank going international.

it will lead to an initial 1.2 billion pound loss.

There is also much going on elsewhere including some familiar names.

Monte Paschi

The saga of the world’s oldest bank has gone as follows. It found itself with ever more non- performing loans which increasingly challenged the solvency of the bank itself. This was met with a barrage of denial and political rhetoric as Italy’s Finance Minister Padoan told us that there would be no bailout and a year or so ago Matteo Renzi who was Prime Minister declared that the shares were good value. After shareholders tired of putting ever more good money after the 8 billion Euros they had put in turned bad this happened last December. From Bloomberg.

Monte Paschi was forced to turn to Italy for aid after it failed to raise extra capital from investors in December. The European Central Bank said then it needed to secure 8.8 billion euros ($9.9 billion) to bolster its balance sheet. The government would contribute about 6.6 billion euros, according to a Bank of Italy calculation, with the rest covered by creditors.

As we have discussed before this looks something of a hybrid as there are both bailout and bail in elements to it. We also learnt never to take financial advice from Matteo Renzi. Another issue is the way that this has gone on and on and on, after all it is now June. The media yesterday proclaimed a solution had been found but the detail was weaker.

The deal, following “intensive” talks between Italy, the EU and the ECB, still requires formal approval.

Remember the miss selling scandal?

Monte Paschi will compensate retail junior bondholders who weren’t properly informed of the risk they were taking on that bonds might be converted to equity, according to the statement. The bank will buy the converted equity from those investors and pay them in “more secure senior instruments.”

That is what depositors were told – “secure” – when the existing bonds were miss sold to them! Also why would investors want to do this?

Monte Paschi is in discussions with funds including Credito Fondiario SpA and Fortress Investment Group LLC about investing in the riskiest tranches of the securitization, which is backed by loans with a face value of as much as 30 billion euros, people said last month. Atlante II, the private investment fund set up with the help of the state to invest in non-performing loans, is expected to buy the largest portion of the same tranches, they said.

Let us remind ourselves that in a bailout the taxpayer usually takes the riskiest debt, otherwise why is a bailout necessary? If I was an Italian taxpayer I would want to know what was going on here and also why I was backing a private fund like Atlante II?

The Veneto Banks

This saga seems to be something of a never-ending story.

the future of the Veneto banks is still uncertain. The 6.4 billion-euro precautionary recapitalization requested for the two small lenders were thrown into doubt last week after the commission rejected a request by the banks to reduce the 1 billion euros of private capital they’re required to raise, according to people with knowledge of the matter. ( Bloomberg).

Still I spotted this earlier and there are translation risks but Finance Minister Padoan does of course have a track record.

the problem of banks was exaggerated

Yet some seem to disagree with this. From Reuters.

“The effects of not solving the crisis at the two banks would not be smaller than those created by a default by Greece,” CEO Fabrizio Viola said in an interview with daily Corriere della Sera………Viola added that the effects should not be underestimated given that the two lenders have extended loans worth 30 billion euros, mainly in the industrial north eastern regions of the country, and “calling them back would create tremendous chaos”.

Usually we find people telling us that they are not Greece!

Banco Popular

This is a different type of situation as the Spanish economy has been doing well in recent times but Banco Popular has been unable to benefit enough from this to offset past troubles. From the Financial Times.

Popular, which earlier this month disclosed a €137m loss for the first quarter, linked to higher provisions on its real estate portfolio.

As ever pouring in more equity via rights issues has been unable to match the scale of the downturn.

Mr Lowe ( an analyst at Berenberg ) estimates the bank, which has a market capitalisation of €2.6bn and raised €2.5bn from shareholders in a rights issue last year, needs to raise €3bn-€5bn in additional capital, on top of asset sales. “If you were to raise €3bn, the market may still question the capital situation,” he said, adding that even in that case, the share count would more than quadruple, creating “huge dilution” for shareholders.

As we see shareholders being blitzed let me raise an issue which gets swept under the carpet. The official prospectus for a rights issue is supposed to be a true and fair record of the situation yet banks keep doing them and then heading south at full speed ahead. But no-one seems to go to jail for what must be misrepresentations. This is an international issue as for me the Royal Bank of Scotland rights issue of 2008 seems an example of this which could not be much clearer.

Bond Vigilantes have provided us with another example of the woes of Banco Popular.

Comment

This September marks the end of a type of lost decade for UK banks as it will be the anniversary of Northern Rock having to go cap in hand to the Bank of England. Who thought we would still be reviewing something of a mess this far down the road back then? However have one or two like Lloyds Bank finally seen the beginnings of a new hope? If so it will be because the UK did at least face up to some of the problems at the time. Sadly not all of them or we would be in a better economic place now.

However if we look at Italy we see an example of country that has used this lost decade to mostly stick its head in the sand and deny everything. So presumably it will take it much longer to even have a hope of a turn for the better.

 

 

How are the bank and Alitalia bailouts going in Italy?

It is time again to dip into the delightful country that is Italy as one of the features of life there makes the news. The saga of the national airline Alitalia has been going on for the best part of a couple of decades but has now reached something of a climax. Here is Sky News on the subject.

Shareholders in Alitalia have voted unanimously for the airline to enter administration, in a deal with the Italian government that would allow it to keep flying.

The move was approved by investors days after the airline’s staff rejected a proposed restructuring that would have seen 1,700 of them lose their jobs – with the rest subject to salary cuts of around 8%.

The business model was not viable and Etihad Airlines who own 49% of the airline were unwilling to put in any more cash without reforms. I guess the same sort of reforms which ECB ( European Central Bank) President Mario Draghi asks for at each monetary policy press conference in the one certainty in it. So the Italian state had to step up as Reuters explains.

The government appointed three commissioners to assess whether Alitalia can be restructured, either as a standalone company or through a partial or total sale, or else liquidated.

Rome also threw the airline a short-term lifeline by guaranteeing a bridge loan of 600 million euros ($655 million) for six months to see it through the bankruptcy process.

So another 600 million Euros is being added to the Italian national debt I guess as we wonder if 6 months will be long enough to get us to the other side of the upcoming election. Also there is an element to this saga that makes Alitalia sound rather like a bank.

Outraged at repeated bailouts that have cost taxpayers more than 7 billion euros over a decade, many Italians are urging the government to resist the political temptation to rush to its rescue again.

Speaking of banks

If we think of Italian banks it is hard not to wonder what is happening about the nationalisation about Monte dei Paschi di Siena? After all it was supposed to start at the beginning of the year although there were many problems as I pointed out back then as will in be a bailout or a bail in? According to Il Sole there are ch-ch-changes afoot.

According to certain estimates reviewed by Il Sole, raising the number of job cuts to 5,000 would have a €654 million effect on costs (around half a billion more than the October plan,) the equivalent of 18% of 2016’s costs. This would significantly improve the 54.5% cost/income ratio that the bank had established as a goal for 2019; now, it seems that this could be achieved by 2021.

So the number of job cuts is pretty much doubled which is being sugared by extending the plan a couple of years, or the sort of thing applied to Greece when the numbers do not add up. Also the non performing loans ( let us hope that they do not include Alitalia now ) have not been sorted as putting them in the rescue fund Atlante is so 2016.

Another decisive element, obviously, is the management of the €29 billion in gross non performing loans that still weigh on the bank: many options are being considered, but at the moment the most realistic one calls for Atlante to acquire around €500 million of a junior tranche.

Times must be hard if Atlante is the best option as views like this from Nicholas Zennaro on The Market Mogul have been replaced by write-offs and losses.

The investment in Atlante could not only generate significant profits but also create positive side effects and support a more positive perception of big banks in Italy.

Actually only yesterday Il Sole was looking at another job for Atlante.

 the three banks will be recapitalized (from the Resolution Fund, then by “healthy” banks) for 450 million. The other condition was the sale of approximately 2.2 billion euros of impaired loans, to which the Atlas Fund will be charged.

They are referring to what now seems to be called Ubi Banca.

Meanwhile in something of a dizzying whirl as some banks are moved into Atlante from the state others are heading in the opposite direction. This is Il Sole via Google Translate last month on Banco Popalare and Veneto Banca.

the share in public hands will probably exceed 70% , While – as confirmed by three different sources at Il Sole 24 Ore – Quaestio’s fund ( Atlante) should be at 20-25%, leaving crumbs of crumbs on small members, already marginalized by the increases of a year ago.

Apologies for the clunky translation but I think you can all figure what happened to existing shareholders. But this looks like a game of pass the parcel with everybody hoping that the music never stops. Indeed I wonder if any real progress has been made.

The situation is fluid because regulators have not yet agreed with prices and how NPL will be disposed of and what will be the consequent erosion of the 3.9 billion of net assets currently available to banks,

This is all quite a mess as we wonder if this will be a bailout or a bail-in and what will happen to the bondholders? These are supposed to take the strain now but the fact that ordinary Italian savers were miss sold some of these bonds means that the government is twisting and turning to try to avoid that. It has created a type of paralysis which seems to be speading. What can happen to bonds well Alitalia did give us a clue?

I wonder who the holders are/were? No doubt someone is already suggesting that the ECB should buy them all……

The unemployment problem

The paralysis described above seems to lead into this as we saw yet another disappointment yesterday as follows.

In March 2017, 22.870 million persons were employed, unchanged over February 2017. Unemployed were 3.022 million, +1.4% over the previous month….. unemployment rate was 11.7%, +0.1 percentage points over the previous month,

This is supposed to be an economic recovery driven by negative interest-rates and some 1.8 trillion Euros of bond purchases and yet unemployment rises and not falls. There was better news on youth unemployment but look at the level of it.

Youth unemployment rate (aged 15-24) was 34.1%, -0.4 percentage points over February 2017

Comment

The Italian system seems ossified creating something of a zombified banking sector and indeed national airline. This means that even in a much better phase for the Euro area with economic growth just reported of 0.5% in the first quarter of this year that unemployment in Italy rises instead of falls. It represents quite a failure in the circumstances for the level of unemployment to be 29,000 higher than last year.

Yet there are areas where Italy shows excellent management skills. Allegri has taken Juventus to the Champions League semi-finals and Claudio Ranieri took little Leicester to English Premier League triumph last year. As we stand Antonio Conte’s Chelsea  lead this year with 4 games to go. What of course is lacking in the banking story is the sort of decisive action that he took when switching to three at the back. The exact opposite of paralysis. If men like these were in charge then it is hard to avoid the feeling that we would see more news like that below rather than more “girlfriend in a coma” worries.

The rate of growth in manufacturing output reached the highest for six years in April, having accelerated for the third month in a row

Can the economy of Italy throw off its past shackles?

It is time to take another look at how the economy of Italy is performing and first let me point out that the backdrop is good. What I mean by that is that the outlook for the Euro area is currently rather good with this being reported by Markit at the end of last week.

Eurozone economic growth gathered further momentum in March, according to PMI® survey data, reaching a near six-year high…….The March flash PMI rounds off the best quarter for six years and signals GDP growth of 0.6% in the first quarter

That has been followed this morning by better news on the inflation front for March as lower petrol and diesel prices have pulled back both Spanish and some German regional inflation from the February highs this morning. Actually Spanish inflation seems very volatile and therefore difficult to read but this month’s picture seems lower than last even allowing for that. But overall there seem to be some economic silver linings around albeit that there was a cloud or two as the credit data lost some momentum.

What about Italy?

The sentiment numbers here released yesterday were positive as well.

With regard to the consumer survey, the confidence climate index grew in March 2017 from 106.6 to 107.6……With reference to the business surveys, the composite business confidence climate index (IESI, Istat Economic Sentiment Indicator) increased from 104.3 to 105.1.

However there was something rather Italian in all of this good news as I note this.

while the personal and current components worsened from 102.1 to 101.0 and from 104.7 to 104.5

Whilst the outlook is favourable it does not seem to have impacted so far on Italians themselves.

What about industry?

On Tuesday the Italian statistics office served up a swerving serve that Roger Federer would be proud of as its headline showed both industrial turnover (1.9%) and new orders (8.6%) rising. But if we look deeper as there were 21 days this year as opposed to 19 last we see this.

In January 2017 the seasonally adjusted turnover index decreased by -3.5% compared to the previous month (-2.3% in domestic market and -5.4% in non-domestic market)……..In January 2017 the seasonally adjusted industrial new orders index decreased by -2.9% compared with December 2016 (-6.6% in domestic market and +2.6% in non-domestic market).

So it was a bad January meaning that quarterly growth fell to 1.7% for turnover and 0.8% for new orders.

If we look for context of the Italian problem we see some of it in the underlying index which was set at 100 in 2010 and has now risen to 100.3. If we look further we see another sign as the growth has been export-led (121.7) whereas the domestic market has fallen to 91.5. Thus the domestic numbers are more depressionary than recessionary.

If we move to production we see that it fell by 0.5% in January leaving it at 93.8% of the level seen in 2010.

Retail Sales

If we look at the latest data we see that the better sentiment has yet to impact here.

In January 2017 the seasonally adjusted retail trade index increased by 1.4% with respect to December 2016 (+2.3% for food goods and +0.8% for non-food goods). The average of the last three months compared to the previous three months was unvaried. The unadjusted index decreased by 0.1% with respect to January 2016.

The underlying index returns us to thoughts of an economic depression as this time an index set at 100 in 2010 compares to 95.7 in January.

Employment and Unemployment

This continues a rather troubled pattern so let us start with the good bit.

The labour input used in the economic system (expressed by the hours worked in the national accounts) increased by 0.4% quarter-on-quarter and by 1.6% year-over-year.

So there is more work around but because of the past pattern it is hard to look past this.

The unemployment rate confirmed at 11.9%, up by 0.2 percentage points after the substantial stability over the four previous quarters.

Some of that is technical as the particpation rate rose reversing for example some of the arguments over the US labour market but it is also true that the previous year saw unemployment rise by 108,000. So we see that this problem is persisting when if we look at other metrics it should not be.

Also we get a clue perhaps as to the current issues with retail sales as we note that real wages are under pressure.

as a result of a 0.2% increase in wages ( in 2016).

 

Population

The numbers for 2016 are out and they tell us this.

The population at 1st January 2017 was estimated to be 60,579,000; the decrease on the previous year was 86,000 units (-1.4 per thousand).

This happened in spite of the growth from migration.

The net international migration in 2016 amounted to +135 thousand, a similar level to that seen in 2015. Compared to the latter it was determined by a higher number of inflows, 293 thousand, and a new record of outflows, for the recent time, equal to 157 thousand.

As we see people are leaving but are being replaced and some presumably mostly by those crossing the Mediterranean.

Also the demographics clock continued to tick. However let me also welcome this as people are living longer.

The mean age of the population at 1st January 2017 was 44.9 years, two tenths more than in 2016.

The banks

This has become a little like the never-ending story. After all what news is there some 3 months down the road after the announcement of a bailout for Monte Paschi. Well according to Bloomberg there are ongoing arguments.

In the view of some ECB Supervisory Board members, while Monte Paschi cleared the hurdles for aid, its viability was bolstered by unrealistic valuations of its bad loan portfolio, the people said. The board gave the all-clear even though the possibility that Monte Paschi sold junior bonds inappropriately to retail investors wasn’t fully reflected in the solvency assessment, they said.

There is also the issue of what will happen to Banca Popolare di Vicenza and Veneto Banca. The official view is that this will be solved “soon” which is a line they also use for Greece.

Also remember the Atlante bailout fund which was supposed to rescue things which rather embarrassingly was followed by Atlante 11 as it needed more funds, how is it going? From Teleborsa.

Intesa Sanpaolo is not prepared to add other loans in the Fund Atlas. It does not leave space for imagination Carlo Messina, CEO of the banking group……..”There is no doubt that today the one to which we must aim is to safeguard the investment made in Atlas “

Perhaps he is worried by this in 24 ORE.

Altogether, as reconstructed by Radiocor Plus, the adjustments made by the top 12 Italian banks that have joined Atlas amounted to 1.01 billion, compared with 1.98 billion actually paid into the fund on December 31 last year (about l ‘ 80% of the 2.45 billion total commitment declared by the main institutions). Less than a year after the birth of the fund, the average write-down was then 51.2% of actual amounts paid.

Comment

As ever there is much to consider and if we look at the forecast of the Bank of Italy against what is for once a favourable backdrop I am reminded of the “Girlfriend in a Coma” theme of Bill Emmott.

We expect GDP to expand, on an annual basis, by 0.9 per cent this year and the next and by 1.1 per cent in 2018 and 2019.

This reinforces my theme that even in the good years Italy manages around 1% economic growth which means that by the time we allow for downturns it is on a road to nowhere. Actually that explains its experience in the Euro area and as the population has grown it has seen GDP per capita fall by around 6%.

If we move to the banking sector we see something very sclerotic which is plainly holding the economy back as we not even the official data shows Non-Performing Loans at 16.24% of the total. If it is true that the Monte Paschi numbers have been “massaged” (again…) then I fear for what the real number is. Yet real reform never seems to actually turn up as we mull another apparently never-ending story.

 

 

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.

Ukraine

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.

Timing

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.

Comment

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?

Links

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

https://notayesmanseconomics.wordpress.com/2015/08/19/ukraine-and-its-economy-is-being-buffeted-by-the-currency-wars-and-china-contagion/