Mps e the strange capital increase: the fact that the EU has decided to turn a blind eye to the ways in which the recapitalization of Monte dei Paschi di Siena took place risks destroying the bail-in in the EU and to re-enable the bail-out?
Surely, the MPS case and the reaction of the EU and the ECB they risk leading investors to believe that the bail-in is rather a ghost institution after all.
On Mps Monte dei Paschi di Siena the spotlights of the Italian press have momentarily gone out, after the presumed success of thecapital increase of 2.5 billion euro.
In the last few hours, on the Meloni government dossier among those that are most burning, instead the Financial Times turned the spotlight back on who, in addition to summarizing the age-old affair, returned to the issue of large commissions (well 125 million dollars) that the Sienese bank paid to the banks of the guarantee consortium for the capital increase.
And on the alleged, for some certain, violation of EU rules on state aid by Italy:
“With investors (the market) showing little interest in participating in the latest capital increase, MPS convinced a group of banks to subscribe the entire share that should have been subscribed by private individuals, in exchange for rich commissions. In order to further reduce their risks, these banks then signed sub-underwriting agreements with other investors, who have agreed to absorb the unexercised shares in exchange for part of the commissions received by the banks”.
A move that, precisely underlines the Financial Times, “it would appear to violate EU rules on state aidwhich establish that the government can participate in a capital increase only if all investors – public and private – are subject to the same conditions”.
Mps, capital increase: really a market operation?
In short, the MPS story continues to fuel the usual suspects: this time the suspicion, more than legitimate, is that the MPS capital increase was successful only because the guarantee syndicate banks sealed off the operation, not without receiving hefty commissions in return.
Can this really define itself a market transaction?
For many, the answer is no. The FT also remembers the short seller’s move which, in the days of the recapitalization of Monte di Stato, even launched an appeal to the European Central Bank to block the operation. Other investors, underlines the British newspaper, contacted EU officials aaccusing MPS and Italy of violating EU rules on state aid.
And what happened? Nothing for now. So much so that in Europe there are fears, writes the FT, that “the absence of a response will jeopardize the existing rules relating to the resolution of banks, that governments do not have to bail out banks at all costs”.
“But for others – can still be read in the in-depth article of the Financial Times – the end justifies the means, especially if that means ending the Mps saga. For the Senator of Forza Italia Pierantonio Zanettinthe last capital increase was practically ‘more a system operation than a market one‘”.
“But it is right – said Zanettin – that in the end it went well and that Mps is finally privatised”.
Also because the bail-in, the senator underlined, “it could end up costing taxpayers even more.”
Does Italy still prefer bailout to bail-in?
Maybe: the UK newspaper has been highlighting it for some years now a very Italian peculiarity, that seems favor bailout over bail-inthus placing the burden entirely on the shoulders of the taxpayers, rather than on those of the bondholders.
“As happened elsewhere during the crisis – read an article from the end of 2019 – the first beneficiaries of a bailout are the bondholders. It is the bonds and deposits that are saved and which, otherwise, should be subject to bail-in” .
But it shouldn’t be like this, given that the EU has passed rules to transfer risk right to the bond holders.
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In the case of the strange capital increase of Mps, underlines the latest article of the FT dedicated to the matter, several “Investors remarked that while the pool of banks and underwriters were offered substantial incentives in exchange for their support, Italian taxpayers had to bear the entire risk of the operation”.
Risk that is still very present, since the troubles for Mps are not over at all.
The next move, for the bank and for the state – in this case for the Meloni government – is to fully return the Monte to the market: it is, therefore, privatisation, which should take place through an M&A operation with another bank.
And here is all to say: first of all, because Mps has the bad reputation of the bank that nobody wants, not even with various state gifts and dowries (the attempt with UniCredit by Andrea Orcel teaches)
Number two, because the feeling circulating among experts is that the bank must still count on the support of Brussels, or of the European Union, to free itself from the presence of the shareholder general staff (with a share of approximately 64%).
This support, this time, is represented by the need that “Brussels is turning a blind eye to what pundits and investors have called a blatant case of breaking the rules by Italy and the bank”.
Violation of EU rules on state aid, to be precise.
Mps and the “undeniable violation of state aid rules”
Even if the commissions that MPS has so generously donated to the banks could be justified by referring to an assessment of the relationship between costs and benefits, Lucia Tajoliprofessor of international markets and European institutions at the Politecnico di Milano, says it clearly:
“It is undeniable that this is a violation of the rules“.
Ma the European Commission has so far not intervened and, for its part, the Sienese bank has not released any comments on the matter.
“Mps has been one of our country’s strategic assets, e the current situation does not allow for further errors – he commented to the Financial Times Walter Rizzetto, deputy of the Brothers of Italy – As the bank looks for a new owner, we need to keep a close eye on events and ensure that MPS is financially sound for years to come.”
But not one mistake has just been made, under the eyes of the ECB and the EU who are pretending nothing happened, by themselves debasing the state aid rules and snubbing themselves primarily those of bank resolution?
The impression is that, “after 15 years of financial scandals, lackluster capital raises, failed stress tests, and losses of billions of euros, both the European Union and Italy simply want to leave behind the problems of the oldest bank in the world” which, to the governments of the moment, has so far given nothing but a hard time.
“Supervisors would have a bigger problem to deal with if in the end Mps fails and someone should eventually explain how we got here – a former MPS executive told the FT – and these people sit in Frankfurt, Brussels, Rome”.
From Antonveneta to the great state error
The original sin of Mps, is remembered, is the acquisition of Antonveneta in 2007, for 9 billion euros, the green light for which was given by the Bank of Italy.
The acquisition was financed by a €5 billion capital increase, a convertible instrument worth €1 billion and billions of complex bonds.
As you remember The sun 24 hours, “the operation is too expensive for the Sienese: the 9 billion paid for Antonveneta leave their mark on the accounts and force them to pay dearly and to capital operations that bleed the Foundation dry which in the end is forced to fall below 50% of MPS capital. And it leaves heavy shadows on the management of the time on which the judicial investigations are now trying to shed light”.
“The acquisition (of Antonveneta) it was the mother of all bad decisions “, Forza Italia senator Zanettin, previously a member of the parliamentary commission of inquiry into banks and the financial system, commented to the FT.
And one of the two former MPS executives contacted by the FT added: “Any average accountant would have understood that the numbers didn’t add up, but the bank’s top management in those days weren’t financial experts. As for supervision, it is difficult to understand how it is possible that they have not seen“.
The FT reminds that “the acquisition was authorized by the Bank of Italy when the former prime minister and former ECB number one was in charge Mario Draghi“. Is that “the Bank of Italy said that the transaction ‘had been authorized because its terms were in line with the criteria set by the rules at that time’.
“History will judge what happened next“, he said Lorenzo Codogno, general manager at the Treasury Department of the Ministry of Economy and Finance from May 2006 to February 2015.
In 2012, the bank filed for state aid, citing its large exposure to government bonds (BTPs), after EBA (European Banking Authority) stress tests revealed a hole of 3.3 billion euros.
After obtaining support, the top management of the bank they made corrections to the accounts to show that losses arising from three derivative contracts entered into between 2006 and 2009 exceeded €730 million.
“In the end Mps paid 11 million dollars to settle litigation over hidden losses, in 2016. Thirteen former bankers were sentenced to prison in 2019 for colluding to cover up losses, before being acquitted on appeal in May this year.
The deal, recalls the Financial Times, “is still being considered one of the biggest financial scandals in Italian history, which has led populist politicians to speak of cursed proof that the whole system is corrupt.
“The irony is that initially the Italian state was reluctant to engage with Italian banks, immediately after the financial crisis. For this reason decided not to intervene with public money to strengthen the Italian banking system, which at the time was characterized by the presence of small banks with large local networks and substantial retail lending activities”.
“In that moment, EU rules did not prohibit these interventions (or state aid), but the Italian government and supervisory authorities believed that (any state aid), in a country with a high public debt, would be negative for the financial markets. Officials also said that, unlike many European banks, Italian banks did not hold ‘toxic assets’ on their balance sheets.
“It was a grave mistake – commented Codogno, who now leads the consultancy firm LC Macro Advisors, based in London – If Italy had injected money into Monte dei Paschi at that time and had taken control of it at that time, we would not be in this situation now”.
Following the financial crisis, Italy effectively faced several crises affecting local banks.
Reason: the NPL boom or even non-performing loans.
Profit margins eroded and MPS made loans worth around €45bn that were never repaid. So much so that in 2014 the bank reported a net loss of 5.4 billion euros.
And the rest is history.