Italy’s Populist Leaders in a Bind Over Yet Another Bank in Crisis

(Bloomberg) -- Before they came to power, Italy’s populist leaders pilloried bankers and painted themselves as champions of the little guy.

Now that an Italian lender is in trouble on their watch though, they may be considering throwing taxpayers’ money at the problem -- just like the last government did.

The European Central Bank placed Banca Carige SpA in temporary administration this week, wielding its power to intervene for the first time and leaving Deputy Premiers Luigi Di Maio and Matteo Salvini to handle the political fallout.

With about 25 billion euros ($29 billion) in assets, Carige poses no systemic threat in itself, and Five Star leader Di Maio and Salvini, of the anti-immigration League, don’t want to be seen to be helping an industry they’ve portrayed as exploiting ordinary Italians. But they can’t afford to be in the frame either if Genoa-based Carige collapses, leaving depositors and creditors on the hook.

“We don’t want another banking crisis and we won’t put one euro of public money into the banks,” newspaper Corriere della Sera quoted Prime Minister Giuseppe Conte as saying in talks with Carige investors in late December.

Something has to give.

The government is trying to find a larger bank that will step in to take over Carige for a nominal price, according to Italian press reports Thursday. But even then it will probably need to put public money on the line in order to close the deal, according to Jacopo Ceccatelli, chief executive officer of Marzotto SIM SpA, a Milan-based broker-dealer.

Italy’s bad-loan management vehicle, SGA, could take up a “large part” of Carige’s approximately 3.7 billion euros ($4.2 billion) in bad and doubtful loans, Il Messaggero reported on Friday, without saying who provided the information. Talks between SGA and the bank’s administrators are “advanced,” the newspaper said.

Taxpayers on the Hook

Carige was put under administration after a plan to sell 400 million euros in stock was blocked by Malacalza Investimenti, the lender’s biggest shareholder. That scuttled its attempt to resolve a chronic capital shortage and meet ECB demands that the bank improve its balance sheet.

Malacalza Investimenti, which owns 27.5 percent of Carige, said in a statement late Thursday that it is not “prejudicially averse” to a capital increase, but wants more information and wants to see an industrial plan before making a decision.

Capital concerns and ongoing management conflict have caused Carige shares to plunge to a fraction of a cent long before being suspended this week. The ECB will assess how much of a 320 million-euro subordinated bond recently sold to an Italian banking industry rescue fund can be converted into shares to boost the bank’s capital, Messaggero said.

“The government wants to be able to say it defended the rights of deposit-holders and small savers, and that it didn’t make taxpayers contribute,” Ceccatelli said. “But in the end the solution is likely to involve proxies for the government.”

Ceccatelli said the government is likely trying to copy Intesa Sanpaolo SpA’s takeover of two Veneto-based banks in 2017, which required almost 5 billion euros of public money as well as state guarantees to mitigate the risk of additional losses coming to light. In that instance, state-owned lender Cassa Depositi e Prestiti SpA may play a role, he said.

Salvini’s League, with its electoral base in the business-rich north, is more open to the state using taxpayers’ money to aid Carige than Five Star, strongest in the depressed south, with a solution seen within three to four months, according to newspaper La Stampa.

“Whoever buys will need reassurances from the state," said Vincenzo Longo, an analyst at IG Markets in Milan. "That’s a tough call for the government given the past propaganda.”

Five Star founder Beppe Grillo, a comic-turned-politician who is from Genoa, built support for his political insurgency by railing against banks and big business as part of an elite that had taken advantage of ordinary Italians for years. He attacked the center-left government’s rescue of Banca Monte dei Paschi di Siena SpA in 2017 when its bad debts threatened to bring it down.

Expensive Promises

After March’s general election, Five Star and the League drafted plans to unpick the banking supervisory regime that resulted from years of effort at national and international level to shield taxpayers. They proposed reimbursing retail shareholders who’ve seen their bank investments sour, more protection for savers under the EU’s bail-in system, and "greater accountability” for supervisors.

But in practice, those goals require more public money.

One consolation for the populist leaders suffering another harsh dose of reality just after being forced to back down over the 2019 budget: there’s no sign so far that Carige could set off a broader chain reaction in the Italian financial sector.

“The market isn’t positive on Italian banks but there’s no catastrophe or systemic risk around the corner,” Ceccatelli said. That view was echoed in a commentary by Illimity Bank CEO and former cabinet minister Corrado Passera.

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