David Brierley is a seniorwriter with S&P Global Market Intelligence. The views and opinionsexpressed in this piece are those of the author and do not necessarilyrepresent the views of S&P Global Market Intelligence.
President Mario Draghiproclaimed July 21 the need for "a public backstop in times of exceptionalcircumstances" for nonperforming loans, just as Italy's was in Frankfurt seeking ECB support for a plan to offload €27.7 billion ingross NPLs.
Draghisaid governments should ease NPL trading and help avoid fire sales when marketswere not working, although he was careful to note that any such step had to beagreed with the EU and comply with competition rules. Despite thisqualification, Draghi said Italy could do more to help the NPL market, arguingthat the problem "needs to be addressed" with a "consistentsupervisory approach."
Bankshares in Italy responded positively to Draghi's comments, while the euro wasbroadly stable against the dollar after rates were left unchanged.
Addressingthe NPL problems of Monte dei Paschi has become a key issue for the Italiangovernment. The ECB has ordered sweeping reductions in the lender's stock of NPLs, which stood at€46.9 billion at 2015-end with 49.8% coverage, according to S&P GlobalMarket Intelligence figures.
Varioussolutions have been leaked to the media. IlSole 24 Ore wrote July 21 that a combination of a capital raise to coversale losses and NPL securitization through the Atlante bank rescue fund isbeing pursued. Some €9.7 billion in net NPLs, equivalent to around €20 billiongross, could be removed.
Atlantewould supply €1.7 billion in capital or mezzanine finance, would provide a€6 billion bridging loan prior to the issuance of senior debt, and Monte deiPaschi would stump up €2 billion in capital to absorb uncovered losses. Afurther €1 billion to €2 billion in equity could be required to cover othersoured loans.
Oneflaw in this potential solution is that incurring losses on asset sales couldreduce the value of other loans in Monte dei Paschi's books. This could createa further capital need, lifting the total required to €6 billion. Some sort ofstate guarantee here might reduce the challenge.
Similarplans were mooted by the Financial Timesand Reuters, with the former suggesting that the state-owned would beheavily involved in a last-gasp attempt to keep the rescue in the privatesector.
Itis quite unclear which private investor might wish to pour up to €4 billioninto Monte dei Paschi when the market values the bank at around €1 billion.Reuters said the equity raise might be underwritten by the state if permittedby the EU, perhaps through the Cassa depositi e prestiti. Yet prima facie thiswould be a breach of EU bail-in rules.
Whateverthe shape of the deal, it is difficult to see how Italy can manage to meetMonte dei Paschi's capital needs, avoid state support and protect Italianretail investors in the bank's subordinated debt. SocGen analystscommented July 19 that Italy is unlikely to be able to avoid bailing insubordinated debt if the state is involved in the "solution." Yetdoing this could well spell the end of Prime Minister Matteo Renzi's government.