Italy's €17bn bank job: self-preservation at a long-term EU price?
The European Union authorities seem to be making up the rules on banking bailouts as they go along. The latest Italian example – – drives a coach and horses through the idea that taxpayers must be spared financial punishment, as far as possible, when lenders can’t fund themselves.
The two banks are being wound down via a deal that separates the good parts of the loan books from the bad. The healthy portion will be shoved into Italy’s largest retail bank, Intesa Sanpaolo, which has been given €5.2bn (£4.6bn) by the government to ease the process. The Italian state will then take responsibility for the bad loans by agreeing €12bn of guarantees.
That potential €17bn bill represents a direct exposure for Italian taxpayers and – critically – it is so large because holders of the senior bonds, or IOUs, in the two ailing banks aren’t being wiped out. Instead, the bonds will become payable by Intesa, which means they ought to be safe.
So what happened to the rule that all bondholders must be obliterated before taxpayers contribute? That principle was introduced in the EU after the 2008 global financial crisis to quell the justified outrage that taxpayers, in effect, had been underwriting private sector banks’ bad bets. On this occasion, however, only shareholders and junior bondholders are being cleaned out.
The Italian government, it seems, has been able to plead successfully that the “national interest” will be served by protecting the senior bondholders because the local economy in the Venice region would suffer if Veneto Banca and Banca Popolare di Vicenza collapsed chaotically. And the has swallowed this line with the imaginative explanation that the two banks are too small to matter from a competition perspective. In other words, one side says the ailing duo are critically important, while the other says they’re irrelevant. It makes no sense.
Being generous, one could argue that the Italian authorities have been pragmatic since, unusually in a EU country, small savers often own bonds directly. What’s more, by rescuing senior bondholders, they have averted the danger that capital would flee from other weak Italian banks. That was enough to boost the bond and share prices of most Italian banks on Monday.
Yet one cannot get around the fact that the spirit of the relevant EU banking directive has been ignored. The rules apply, except when they don’t, it seems. That has two important consequences. First, as Capital Economics argues, the “doom loop” between Italian banks and the Italian government remains a worry. If taxpayers can be on the hook at two regional banks, they may also be exposed if and when the banks are more important and the sums significantly greater.
Second, as the thinktank also points out, the cause of banking and fiscal integration in the eurozone has just suffered a serious jolt. In the next round of collective risk-sharing, eurozone states are supposed to guarantee deposits in each others’ banks. It is now hard to imagine Germany rushing to join such a scheme.
So forget the market’s initial cheery response to this Italian bank job: a short-term problem has been fixed only by raising major long-term uncertainties. That does not feel like progress.
Healthy price for Holland & Barrett
Russian billionaires don’t need advice on how to spend their money, but seems a very expensive way for Mikhail Fridman to make a splash on the retail scene.
On the plus side, Holland & Barrett is a grand old retailing name that has been around for 145 years and these days extends well beyond the UK. The chain also has a presence in the Netherlands, Malta, China, India and the United Arab Emirates. And its profit margins are famously fat: the business is thought to have achieved top-line profits of about £150m on revenues of about £600m last year.
Yet such a ratio would make most non-billionaires wonder about sustainability. Aren’t vitamin tablets and protein powders natural territory for Amazon? Isn’t a cuddly slogan – “Bringing wellness to the world one happy customer at a time” – an imperfect defence against aggressive pressures?
Fridman’s L1 outfit has Clive Humby, the data guru behind Tesco’s Clubcard scheme, on its team, so maybe there are clever ways to improve Holland & Barrett’s current loyalty programme. All the same, the biggest winner here is surely the seller, private equity house Carlyle. You won’t find stock market investors paying a multiple of three times sales for a cod liver oil merchant.
Germany is booming – but without the Brexit blues
Britain’s manufacturers are enjoying the strongest demand for their products in almost 30 years, . The exciting export story is very welcome, of course. But, in case fans of Brexit get too carried away, they should look at what’s happening in Germany.
According to the local Institute for Economic Research, German business as a whole is feeling more confident than it has ever been. Unlike their UK counterparts, they’re probably not fretting about their domestic situation and a squeeze on consumers’ real incomes.