The biggest problem facing European banks – one we highlighted most recently yesterday when we showed the latest 20% surge in Spanish Banco Popular Non-Performing Loans to a fresh record – and one we have been covering since 2010, which as of 2012 amounted to some $4.5 trillion that needs to be “remedied” – is the staggering amount of bad debt on the books of Europe’s numerous banks, the bulk of which especially in the periphery are cojoined with their sovereign host in an unbreakable bond which despite Europe’s theatrical attempts to sever, only keeps getting stronger.
But while, so far at least, the conventional “under the table” can-kicking European bailout mechanism involved a process whereby banks would issue bonds with a sovereign “guarantee”, then promptly repo them to the ECB at virtually no haircut as the Goldman alum-led central bank did everything in its power to keep injecting liquidity in an insolvent continental banking system (while everyone pretended to not realize what was going on as the “A-ha” moment of public epiphany would mean the emperor would suddenly have no clothes and the jig was up), this week things changed.
On Wednesday, Italy’s government voted final approval to a decree hiking the value of Bank of Italy’s share capital from €156K to €7.5 billion – something that had not been done since the 1930s. Of course, politicians determining the fictitious value of a central bank is one thing, as idiotic as it may be. However, what is truly preposterous is the covert bailout that accompanies the decree: a key part of the decision was setting a 3% ceiling on the stake that the bank’s shareholders can own in the central bank. This means, as Reuters reports, that Intessa and UniCredit, currently the central bank’s largest shareholders with stakes of 42 percent and 22 percent respectively – not to mention two of Italy’s most NPL-heavy banks – will have to sell the bulk of their central bank “equity” stakes. And who will they sell them to? Why the central bank itself, and in return they will pocket up to €3.5 billion ($4.7 billion) from the sale of their central bank holdings. Said otherwise, Italy took not only bizarro accounting, but also monetary financing of insolvent banks by the monetary authority, and thus Italy’s taxpayers, to the truly next level.
