World’s oldest bank could become EU’s newest problem

Banca Monte dei Paschi di Siena prides itself on being the world's oldest bank but could, along with its peers, turn into Europe's newest problem as some analysts fear its bad debts may trigger a bank crisis in Italy and eurozone turmoil.

World's oldest bank could become EU's newest problem
The ancient headquarters of Monte dei Paschi di Siena. Photo: Giuseppe Cacace

Italy's number-three bank, BMPS, has taken a hammering on the stock market this week after the European Central Bank told it to slash its bad debts, its shares plunging 14 percent on Monday and by nearly 20 percent on Tuesday.

But expectations that a solution may be underway boosted them by 14 percent early Wednesday, and a ban by the stock market regulator on speculation also helped the rebound.

With gross bad loans amounting to €46.9 billion ($52 billion), BMPS, is at the forefront of concerns about the fragile balance sheets of Italian banks, which are weighed down by €360 billion in bad debt.
The situation has come to a head as Britain's shock vote to leave the European Union has reduced expectations for growth, and thus the ability of Italian banks to handle their debt burdens.
The demand by the ECB has raised the heat on BMPS, but Europe's banking regulator is expected to release its health checks on banks later this month and which could mean other Italian lenders will have their feet to the fire.
A huge bad debt burden is poison for the economy as it restricts the amount of money that banks can lend to businesses, thus holding back growth.
The Italian economy has been ticking along with tepid if any growth the past few years, failing to recover much ground lost following the global economic and eurozone crises.

Italy has tried

Italy has been trying to tackle the bad debt issue but it poses political as well as economic difficulties for the government of Prime Minister Matteo Renzi.
He has been hamstrung by new eurozone rules with restrict bailing out banks with public money without requiring investors to also bear part of the burden.
That is particularly difficult in Italy as bonds issued by banks have been popular among small investors looking for interest income given the ultralow rates.
An effort to restructure four banks angered small investors who lost part of their funds.
The government then organised the creation of the €4.25-billion Atlante fund backed by private funds to take bad loans off banks.
When banks sell bad loans, they usually do so at a fraction of the original amount, thus forcing them to realize a huge loss and usually requiring investors to pump more capital into the bank so it can meet regulations to resume lending.

German block

Given the poor economic outlook, finding willing investors can become difficult. As the value of Italian bank shares have fallen by over half since the start of the year, existing investors have to pump in large sums or see their existing stakes diluted considerably.
Renzi has sought an exemption to allow a state bailout of banks, but Germany has opposed rewriting the rulebook every time there is a new problem.
Italy is in negotiations with the ECB and the European Commission to find a way forward and avoid taking the path that eventually led Spain to seek an EU bailout for its banks in 2012.
The Italian daily La Repubblica reported Wednesday that under a plan that Rome and Brussels have been discussing for days would “see the Commission give a green light to Italy to take advantage of the exemptions … to be applied in the case of systemic risk and in the wake of Brexit.”
The newspaper said the existing Atlante fund plus others and another to be created, would relieve BMPS of a good chunk of its €47 billion euros in bad debt and inject €5-6 billion euros of fresh capital into the lender.
The business daily Il Sole 24 Ore said the solution would involve state guarantees on the capital invested into the banks.
“That's how the state intends to come to the rescue of BMPS, in a move that, if necessary, may be useful for other institutions too,” said the newspaper.
Renzi has a lot at stake as a failure to avoid a banking crisis would not only endanger the economy, but complicate his effort to have constitutional reforms approved in an October referendum.
He has threatened to step down if voters reject the measures that aim to make Italy more governable, and Renzi's departure could open the way for further electoral successes for populists who want a vote on abandoning the euro.
An Italian banking crisis also risks rippling throughout the eurozone.

'Eurozone banking crisis'

“This has the potential to go beyond Italy given the linkages throughout the system,” said Michael Hewson, chief market analyst at CMC Markets.

“If EU leaders can't resolve the problems in the Italian banking sector it could bring the whole sector crashing down,” he told AFP.

“Without an early resolution of these problems there is the risk of yet another eurozone banking crisis,” concurred VTB Capital economist Neil MacKinnon.

Hewson was sceptical of a taxpayer-funded bailout of BMPS, noting it has been unsuccessfully rescued twice in recent years.
“No point in throwing more money at it,” he said.

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The Euro celebrates its 20th anniversary

The euro on Saturday marked 20 years since people began to use the single European currency, overcoming initial doubts, price concerns and a debt crisis to spread across the region.

The Euro celebrates its 20th anniversary
The Euro is projected onto the walls of the European Central Bank in Brussels. Photo: Daniel Rolund/AFP

European Commission chief Ursula von der Leyen called the euro “a true symbol for the strength of Europe” while European Central Bank President Christine Lagarde described it as “a beacon of stability and solidity around the world”.

Euro banknotes and coins came into circulation in 12 countries on January 1, 2002, greeted by a mix of enthusiasm and scepticism from citizens who had to trade in their Deutsche marks, French francs, pesetas and liras.

The euro is now used by 340 million people in 19 nations, from Ireland to Germany to Slovakia. Bulgaria, Croatia and Romania are next in line to join the eurozone — though people are divided over the benefits of abandoning their national currencies.

European Council President Charles Michel argued it was necessary to leverage the euro to back up the EU’s goals of fighting climate change and leading on digital innovation. He added that it was “vital” work on a banking union and a capital markets
union be completed.

The idea of creating the euro first emerged in the 1970s as a way to deepen European integration, make trade simpler between member nations and give the continent a currency to compete with the mighty US dollar.

Officials credit the euro with helping Europe avoid economic catastrophe during the coronavirus pandemic.

“Clearly, Europe and the euro have become inseparable,” Lagarde wrote in a blog post. “For young Europeans… it must be almost impossible to imagine Europe without it.”

In the euro’s initial days, consumers were concerned it caused prices to rise as countries converted to the new currency. Though some products — such as coffee at cafes — slightly increased as businesses rounded up their conversions, official statistics have shown that the euro has brought more stable inflation.

Dearer goods have not increased in price, and even dropped in some cases. Nevertheless, the belief that the euro has made everything more expensive persists.

New look

The red, blue and orange banknotes were designed to look the same everywhere, with illustrations of generic Gothic, Romanesque and Renaissance architecture to ensure no country was represented over the others.

In December, the ECB said the bills were ready for a makeover, announcing a design and consultation process with help from the public. A decision is expected in 2024.

“After 20 years, it’s time to review the look of our banknotes to make them more relatable to Europeans of all ages and backgrounds,” Lagarde said.

Euro banknotes are “here to stay”, she said, although the ECB is also considering creating a digital euro in step with other central banks around the globe.

While the dollar still reigns supreme across the globe, the euro is now the world’s second most-used currency, accounting for 20 percent of global foreign exchange reserves compared to 60 percent for the US greenback.

Von der Leyen, in a video statement, said: “We are the biggest player in the world trade and nearly half of this trade takes place in euros.”

‘Valuable lessons’

The eurozone faced an existential threat a decade ago when it was rocked by a debt crisis that began in Greece and spread to other countries. Greece, Ireland, Portugal, Spain and Cyprus were saved through bailouts in return for austerity measures, and the euro stepped back from the brink.

Members of the Eurogroup of finance ministers said in a joint article they learned “valuable lessons” from that experience that enabled their euro-using nations to swiftly respond to fall-out from the coronavirus pandemic.

As the Covid crisis savaged economies, EU countries rolled out huge stimulus programmes while the ECB deployed a huge bond-buying scheme to keep borrowing costs low.

Yanis Varoufakis, now leader of the DiEM 25 party who resigned as Greek finance minister during the debt crisis, remains a sharp critic of the euro. Varoufakis told the Democracy in Europe Movement 25 website that the euro may seem to make sense in calm periods because borrowing costs are lower and there are no exchange rates.

But retaining a nation’s currency is like “automobile assurance,” he said, as people do not know its value until there is a road accident. In fact, he charged, the euro increases the risk of having an accident.