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First Spain, and now Italy as ECB rushes in to deal with insolvent PIIGS banks

First Spain, and now Italy as ECB rushes in to deal with insolvent PIIGS banks

A couple of weeks ago, the ECB engineered the final collapse of Banco Popular by allowing Santander to purchase the institution for one euro, and then providing funds to help shore up and recapitalize the bank following the takeover.  And despite EU rules which prohibit bailout interventions, the European Central Bank went around these statutes because Banco Popular’s fall would mean severe problems for Germany’s primary facility, Deutsche Bank.

But problems with the Spanish banks appear to be only the beginning for the designated PIIGS (Portugal, Italy, Ireland, Greece, Spain) nations as on June 23, the ECB once again scuttled a couple of banks in Italy, and a day later broke EU rules again by providing a bailout.

Two weeks after the first, and biggest, European bank bail-in took place under the relatively new European bank resolution mechanism, the EBRD, when Spain’s Banco Popular wiped out the holders of its most risky securities, including equity and AT bonds, and then selling what was left of the bank to Santander for €1 – a process that took place without a glitch –  Italy may have just killed any hope of a European banking union, when the bailout of two small banks made a “mockery” of Europe’s new regulation.

Late on Sunday, Italy passed a decree that will effectively sell the good part of the two banks to Intesa, Italy’s second-largest and best-capitalized bank. Intesa said last week that it would be willing to buy the best assets for a token price of €1 as long as the government assumed responsibility for liquidating the banks’ large portfolio of sour loans. As a result, Italy said it would commit as much as €17 billion in taxpayer funds to clean up the two failed “Veneto” banks in one of Italy’s wealthiest regions and support the takeover of their good assets by Intesa Sanpaolo SpA for a token amount. After an emergency cabinet meeting on Sunday, Finance Minister Pier Carlo Padoan said the Italian government will provide Milan-based Intesa with about €5.2 billion euros to allow it to take on Banca Popolare di Vicenza SpA and Veneto Banca SpA assets without hurting capital ratios, The European Commission, in a separate statement, said it approved the plan for the two banks and that it is in-line with state-aid rules.

Unlike the Banco Popular bail-in by Santander, however, Intesa would only take on the good assets. PM Gentiloni said the lenders will be split into good and bad banks and that the firms, with taxpayers on the hook for the bad banks. The process was rushed to allow the failed banks to reopen on Monday and avoid a depositor panic and bank run. The intervention is necessary because depositors and savers were at risk, Gentiloni said. The northern region where they operate “is one of the most important for our economy, above all for small- and medium-size businesses.”

In addition to the €5.2bn handed to Intesa, an additional €12bn will be available to cover potential further losses at the bad banks, Padoan said, while the Italian Treasury estimates the fair value of the losses at about €400 million. The final number will be far greater. – Zerohedge

So with the ECB intervening with a bailout rather than a full fledged bail-in (minus CoCo bond holders who weren’t provided relief from the Banco Popular collapse), the question that has to be asked is, why has the EU or the European Central Bank not followed their own rules in implementing a depositor backed re-capitalization versus a taxpayer funded one?  The answer of course is that a government can only do a bail-in once, since the first time it occurs in a country no citizen will ever trust banks again.  And with this in mind it appears that multiple governments are creating something new in preparation for this, and is perhaps also why both the United States and Germany have been introducing legislation making it a crime to keep money and assets outside of a bank, using the false argument of terrorism as their premise.

Kenneth Schortgen Jr is a writer for The Daily Economist,, and Viral Liberty, and hosts the popular youtube podcast on Mondays, Wednesdays and Fridays. Ken can also be heard Wednesday afternoons giving an weekly economic report on the Angel Clark radio show.



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