Monte dei Paschi di Siena casts doubts on Italian banking

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The results of the latest stress test of European banks force Monte dei Paschi di Siena to recapitalize, while the announcement rekindles rumors of a new bank bailout in Italy.

The Italian bank Monte Paschi di Siena (MPS) has announced a capital increase of 5,000 million euros, with the intention of strengthening its financial position and improving the quality of its balance sheet after the poor results of the stress test in July and receiving the recommendation of the European Banking Authority (EBA) to reduce its portfolio of loans at risk of non-payment by 27,700 million. The entity thus seeks to strengthen its position after losing in two years (since August 2014) more than 90% of its value on the stock market. In February this year, the announcement of having overcome previous losses and net profit in 2015 seemed to improve the future prospects for MPS, but the EBA test appears to have completely changed the picture.

The results of the stress test on July 29 are generally satisfactory, but not so for Monte dei Paschi di Siena, as it is the only bank to fail the EBA exam. Far from the requirement of 5.5% as a capital ratio, that of the Italian entity stood at -2.23%. Their national counterparts passed the test with relative ease, but that does not seem to be enough to dispel doubts about the sector and push away discussions about a possible bailout. The problem is that the European authorities, until now, have not approved the injection of more public capital in entities that have already received contributions from the State (such as MPS), and the Italian government would also have to respond to public opinion for launch into another bank bailout as he sets out to cut public services.

There is also another alternative to the rescue of MPS, which would be to let the shareholders bear the losses from the readjustment of the balance sheet. This option would have the advantage of not representing any cost to the public treasury, and it would avoid the Government the dissatisfaction with which the public opinion usually perceives bailouts from financial institutions. However, in the case of MPS it is a systemic entity (with which the problems could spread to the rest of the sector) and the shareholders are mostly small and medium savers, many of them retired, so this option it could be more unpopular than the rescue itself. Of course, none of these alternatives should occur if a third scenario is considered, still possible although less and less probable: that entities such as MPS manage to generate confidence in the markets and obtain by their own means the resources they need to recapitalize.

In any case, Italian banks are undoubtedly experiencing serious difficulties as a result of the crisis, as are their European counterparts. In other neighboring countries (such as Ireland, Spain and, to a lesser extent, Portugal and Greece) the problems of the financial sector are related to a pre-crisis period characterized by a process of indebtedness of families above their income level, of the hand of real estate bubble formation. The beginning of the crisis in 2007, resulting in a massive destruction of jobs, deprived many households of the income necessary to pay their debts and led them to default, a problem that ended up having a direct impact on the quality of assets in the hands of financial institutions. The case of Italy, as it is also a country with high levels of indebtedness and where unemployment has increased, seems to many another example of this phenomenon.

However, the data show the opposite: although it is true that debt in Italy is high, most of the problem corresponds to the public sector (whose debt already exceeds 135% of GDP), while the liabilities of households with respect to its income remains well below the European average, even in Germany and France. On the other hand, the gross savings of Italian families is one of those that has fallen the most since the beginning of the crisis (from 13.86% in 2007 to 10.46% in 2014) but it is not far from the community average (12 , 52%) and exceeds that of other eurozone economies such as Spain. Therefore, the origin of the Italian banking problems is not in the situation of the families (which, as we have seen, have a relatively solvent position) or in the State, which supposes a continuous demand for credit whose repayment is insured, despite its high level of indebtedness.

The business environment, on the other hand, is more negative, since Italian businessmen must face a deflationary European situation combined with a stagnant national economy (in the second four months of 2016 their growth was 0%, and expect 1% for the whole of the year). This reduction in sales (both in prices and in volume) has had a direct impact on the net performance of the shares of transalpine companies (10.69%), being the lowest of the large economies in the euro area (23.53%). ). If we look at the gross return on invested capital we have similar results: 15.63% in Italy compared to the European average of 23.26%. This drop in profitability has also had a strong impact on investment, which plummeted from 21.57% of GDP in 2007 to 16.59% in 2014. And if exports still play an important role when it comes to boost the economy, the financial situation of small companies (which depend to a greater extent on the local market) has been particularly deteriorated.

It is no coincidence, therefore, that the entities most dedicated to corporate retail banking are also those most affected by the crisis. Monte dei Paschi di Siena, without going any further, accumulated in July a portfolio of 46.9 billion euros in loans to poorly solvent clients, most of which are small companies affected by the crisis. Other large entities less exposed to this type of risk, such as Intesa Sanpaolo or Unicredit, enjoy stronger balance sheets and have comfortably passed the stress tests of the European Banking Authority.

Now the prospect of a constitutional referendum in Italy, the reform packages repeatedly recommended by the European Commission and the impact of Brexit seem to open a new scenario of uncertainty in a country where growth is still too weak to recover income and employment levels. prior to the crisis. The problems of the Italian banking add an important difficulty in this complex context. Its resolution will depend on government policy, its negotiations with the EU and the banks' own ability to reduce non-performing loans, but especially, as is often the case in these cases, on the confidence of the markets.

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