BRUSSELS – New rules governing the rescue of imperiled banks in the 19-country eurozone that seek to protect taxpayers won’t be fudged, officials from the single currency bloc insisted Monday amid growing concern about some of Italy’s lenders.
Worries over the financial health of Italy’s banks have grown more acute since the June 23 referendum result in Britain and the country’s premier, Matteo Renzi, is looking for a way to rescue them from a pile of bad loans that aren’t being repaid.
Jeroen Dijsselbloem, the eurozone’s top official, conceded that Italy’s banks have problems with so-called non-performing loans, but that dealing with them through a fudge of newly created rules was not on the cards.
“It needs to be dealt with. It will have to be dealt with gradually,” he said at a meeting of the eurozone’s 19 finance ministers. “There will be no big solutions … It’s not an acute crisis so that also gives us some time to sort things out.”
Dijsselbloem said it’s important that the eurozone respects what it’s agreed “otherwise everything will be questioned in Europe, and there are a lot of questions in Europe already so we don’t need any more questions.”
Italian banks have been worn down by some 360 billion euros ($400 billion) in loans that won’t be paid back in full. Italy is the eurozone’s third-largest economy so any big crisis there would likely have negative effects far outweighing the impact from the repeated problems over the past few years, notably in Greece.
Many Italian banks have seen their share prices come under intense pressure. Italy’s third-largest lender, Monte dei Paschi di Siena, has been ordered to sharply reduce its load of bad loans and has seen its share price slump by around a third since the British vote. And on Monday, Italy’s largest bank UniCredit also said it is launching an “in-depth strategic review” under its new CEO Jean Pierre Mustier “to reinforce and optimize the group’s capital position, (and) improve profitability.”
Should measures such as those announced by UniCredit not prove to be enough to assuage investors, then the Italian government may have to intervene in some form to help the banks out.
However, any rescue attempt that involves the use of public money could run into resistance from the EU, which recently introduced the new rules to avoid a repeat of some of the recent bailouts that afflicted the eurozone. During the region’s debt crisis over the past few years, the parlous situation of some banks was at the root of some of the bailouts, notably Ireland in 2010.
Taxpayer money can now only be used after bank creditors such as bondholders have been “bailed in,” meaning they lose some of their money before taxpayers chip in. That provision was aimed at keeping the costs of rescuing banks from overwhelming government finances.
“We established these rules coming out of a major banking crisis in Europe,” Dijsselbloem said. “I think bail-ins is a very sound economic principle which basically says that those investors that put in their money and take out some profit in the good years carry the losses in the bad years.”
Dijsselbloem also took a swipe at those bankers that call for public money to be put in when their firms face difficulties.
“There have always been, and will always be, bankers who say we need more public money to recapitalize our banks, and I will resist that very strongly, because again and again it’s hitting on the taxpayer, again and again increasing sovereign debt in countries that are heavily indebted,” he added.
Germany’s influential finance minister, Wolfgang Schaeuble, echoed Dijsselbloem’s view about the importance of respecting rules.
“We all know that the European rules that we created as a lesson from the financial and banking crisis are made to prevent repeats,” Schaeuble said. “It offers sufficient possibilities to respond appropriately to every situation.”
A particular problem for Italy is that about a third of bank bonds are held by small retail investors. Inflicting losses on them, as well as depositors, could be highly unpopular as Renzi faces a key referendum on constitutional reform in October. Using public funds to help the banks would diffuse the costs.
But that would also mean that the EU’s hard-won banking union and bailout rules fail their first road test.
Italy’s Finance Minister Pier Carlo Padoan sought to downplay concerns that have gripped investors recently arguing that they have been overplayed partly because of concerns over the impact of Britain’s exit from the EU, or so-called Brexit.
“We live in times of volatility,” he said. “We have been living in times of volatility for months now, including after Brexit.”
Colleen Barry in Milan and Geir Moulson in Berlin contributed to this report.