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Has the global banking crisis struck Italy?

Monte dei Paschi’s woes are being manipulated to complete banking privatisation

Italy’s banks have been seen as pretty immune to the banking crisis affecting other European countries. But there’s a gathering storm facing the world’s oldest bank, Monte dei Paschi di Sienna, which has been revealed to have hidden enormous losses linked to derivative trades.

The woes of Monte dei Paschi di Sienna, Italy’s third largest bank, have been widely blamed on (Left) politicians misusing their influence exercised via the local authority controlled banking foundation (one of 90 odd across the country) that’s the single largest shareholder in the Tuscan bank.

In what appears to be both an attack on the Left and a move to complete the privatization of banking that started in the 1990s, powerful elements in the country’s mainstream press are arguing that itis time to take the politics out of bank decisions and let market imperatives prevail at the Tuscan bank. 

Italian Economist Emiliano Brancaccio can’t see what politics has to do with the whole affair, and instead sees the Sienna bank’s problems as the ‘tip of the iceberg’ in a speculation-fuelled financial crisis that started abroad in 2007/8 that is finally crashing into Italy’s shores. 

Austerity polices, leading to economic collapse, are weakening Italy’s banking system, as elsewhere. Yet, instead of reversing the devastating cocktail of simultaneous spending cuts and tax rises across the region, the EU elites are touting European banking union as a fix to Europe’s tottering financial system. But this could end up as a vehicle for bargain-priced foreign take-overs of southern Europe’s banks, so it is not in Italy’s interests or those of other PIIG countries, according to Brancaccio.

Instead, the bank should be nationalised to improve its chances of supporting the local and wider economy with loans, he says.

Here’s an interview Brancaccio with published earlier this week:

‘It’s very odd, almost bordering on the comic, to see the attempt by certain elements of the media to characterise the case of Monte dei Paschi di Sienna as a result of political interference in banking management. Sergio Rizzo, in Corriere Della Sera even stated that the key issue is the dependence of the Siennese bank on political power. In his view, therefore, all that is needed to solve the problems of MPS is to stop the politicians’ meddling and let the bank follow the logic of the market. But any observer who is not blinded by liberal ideology knows that this is a misleading and Manichaean interpretation of the facts.

‘In truth the crisis of Monte dei Paschi di Sienna is only the most obvious early sign of a systemic banking crisis, which has its roots in the wave that led to the speculative collapse in October 2008 and the ensuing l damage that is placing an ever increasing burden on government budgets and taxpayers. ”

Brancaccio knows a thing or two about this particular Tuscan bank, having being called in in 2006 to assist in reviving a smaller bank (Banca Toscana) it owned. Two years later, despite the progress, Banca Toscana was suddenly closed and incorporated into the Monte. It was not an isolated case: the whole Monte dei Paschi di Sienna group underwent a major restructuring. Giuseppe Mussari, then president, justified this move on the premise that the Siena bank had to divert all its internal resources to finance the costly acquisition of Antonveneta. This acquisition has also been blamed for MPS current woes…

‘Today it is fashionable to point the finger at that deal, but it should be remembered that at the time most of the national media praised the purchase of Antonveneta by Monte dei Paschi. Personally I, with others, criticized the decision of Monte dei Paschi’s top management to concentrate all efforts on the acquisition of Antonveneta. Our criticisms, however, were decidedly in the minority. And above all they were very different from those on which many commentators today seem to focus. The problem that we posed was that the deal took place at a price that was probably situated at the peak of a huge bubble. A bubble that, in our opinion, was bound to burst.

‘[Financial daily] Il Sole 24 Ore, which was perhaps more balanced in its assessment of the deal than others, recognized the problem. But then it also said that after “market turbulence passes, the branches will remain.” The trouble is that it was not mere “turbulence”. In fact we were on the cusp of the most violent financial and economic crisis since the war, which would soon lead to a steep fall in the value of the banks. The true fault of Mussari, therefore, was not to have realized that he was trying to get in on the big boom in financial values ​ when the speculative orgy was over. All subsequent errors are nothing more than a logical extension of the original illusion. ”

Even the lack of information on derivative transactions, which the press is focusing on today, could that be attributed to that original speculative vice?

‘Yes, of course. If it is confirmed that Monte dei Paschi di Sienna failed to supply information to internal and external supervisory bodies, we will be faced with a violation of the law and the statutes. But it is naive to consider this matter from a simply ethical or legal perspective. In this way, you end up interpreting the case as if it were a simple matter of “bad apples”. In reality, the Monte dei Paschi di Sienna case is just the tip of an iceberg of problems afflicting large parts of the [Italian] banking sector, and that is slowly surfacing.

‘At the end of 2007, Monte dei Paschi di Siena assumed a de facto and improvident “bullish” position when the market had already turned downward. For this reason, the Siena bank was among the first to record a significant budget loss, which it sought then to tackle with increasingly questionable and cumbersome financial transactions, which today have risen to prominence in the news.

‘But this perverse dynamic is not limited to Siena. In a more or less accentuated fashion, it involves the entire structure of banking power. The attempt to solve balance sheet collapse with hedges weighs heavily in the long run and is potentially counterproductive. It is a common practice within a system short of oxygen, and will persist for a long time thanks to the speculation of the recent years.

It is said, however, that Italian banks are more solid than the foreign ones, because they have participated only marginally in the financial orgy?

‘That’s a simplification. It’s true that on the balance sheets of Italian banks there is less so-called “junk.” But it is also true that our banking system, like those located in the periphery of the euro zone, suffers badly by the sharp fall in income of debtors and the consequent rise of non-performing loans and failures. These difficulties with repayment make our banks more sensitive to the collapse in share prices that began in 2008. For these reasons, the epi-center of the next banking crisis could be located in the periphery of the euro zone, rather than at the center.

Some say that to give breathing space to troubled banks we should quickly complete the construction of the European Union banking union and related European deposit insurance.

I have some doubts about this, it seems to reflect a rather naif European-ism. If European deposit insurance is introduced in exchange for giving the [financial] European Supervisory Authorities powers to initiate and manage a process of bank restructuring on a continental scale, the banks of peripheral countries could become the subject of foreign acquisitions on the cheap. If this was the case, it would not be a positive outcome.

How then should we intervene? Not only journalists, but also many liberal economists, speak of the need to release the banks from the control of the banking foundations, in order to rescue them from the influence of politics and submit them in a more transparent fashion to the disciplines of the market.

‘The main cause of the crisis hitting Monte dei Paschi di Sienna and that will tomorrow strike other banks, is the speculative dynamics of the financial market, which led to a huge rise in capital values up to 2007 and a subsequent collapse after that date. These violent fluctuations are inherent to the global regime of financial accumulation that we have inherited from the years of the so-called pensiero unico (“single thought”) and that, although in serious trouble, is still dominant. It will be uncomfortable and old-fashioned to admit it, but the so-called “influence” of politics over the banking foundations is irrelevant to this crisis.

‘Rather, we should be clear that the budgetary situation of Monte dei Paschi will not be fixed with loans at 9% from the government. Nor can we think that these loans will facilitate the provision of credit to businesses and households. The only rational solution, at this point, should be to immediately start a process of nationalizing the institution. The latest research shows that the state-owned banks can provide loans on more favourable terms and with particular attention to the longer term, thus serving the [traditional] markets in which they operate, and without being influenced by speculative temptations.

Translation/edit by Revolting Europe


Monte dei Paschi di Siena – a backgrounder

Monte dei Paschi di Siena was lending money before Columbus discovered America, before the Spanish Inquisition and before Henry VII defeated Richard III at the Battle of Bosworth to become king of England.

Today Monte dei Paschi di Siena is controlled by a foundation that is a non-profit local authority-controlled body that must reinvest all dividends in social and cultural projects.

Between 1996 and 2010, the Monte dei Paschi di Siena foundation spent nearly 2 billion euros, more than half of which in the province of Siena alone, funding everything from a biotech facility to the building of roads to the training of horses for the Palio horse race. In the meantime, the bank, founded in 1472 and which now has branches worldwide, grew into Siena’s largest private employer with 31,000 staff. An old adage says the city’s 60,000 residents are divided into three categories: those who work for the Monte dei Paschi bank and foundation, those who are studying to work for it and those who are receiving pensions from MPS.

In 2007, when Monte dei Paschi bought a smaller bank, Antonveneta, to expand its foothold in Italy’s wealthy northeast, paying a whopping 9 billion euros in cash for it just months before the beginning of the financial crisis. The acquisition catapulted the bank into Italy’s big league — making it the country’s number three lender after Intesa Sanpaolo and UniCredit. But it strained its finances to the limit, and the bank never fully recovered, also because the economic downturn hurt its profitability.

That in turn cut the foundation’s only source of income — the bank’s dividends — just as it stumped up to fund two capital increases in 2008 and 2011 to maintain a majority stake in the bank. As a result, the foundation reported a loss of 128.4 million euros in 2010 — the first in its history. Around 90 percent of its 5.5 billion euros in assets are invested in the bank, but the book value of the shares is more than double the current stock price — meaning it faces a potential loss of more than 3 billion euros.

The crisis at the foundation has reverberated throughout the region. In 2011, funding dried up to just 18 million euros from 197 million euros in 2006, and this year things are unlikely to improve as Monte dei Paschi was forced to scrap its dividend. The Siena Biotech hub, for example, fears that the 10 million euros it receives annually on average from the foundation could be sharply reduced.

Italy has around 90 banking foundations with total assets of about €50 billion and they are the largest investors in Italy’s banking sector.

Source: WSJ, SRI

About revoltingeurope

Writer on Europe's Left, trade union and social movements @tomgilltweets or @revoltingeurope


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