Banking shares across Europe are rallying, especially share prices of Italian banks.
It’s not because they’re in good shape, or netting more profits, or have great yields.
They’re rallying because the possible collapse of Italy’s Banca Monte dei Paschi di Siena and the contagion fears that come with a big bank failure, have been diverted, for now.
Investors who had shed bank shares, driving their prices into the bargain bin, are now jumping back into these same banks hoping to pick them up on the cheap.
But getting into European banks right now is a dangerous game because nothing is certain.
European Bank Shares Are Rallying… for Now
While bank shares rallying on the prospect of another state-sponsored bailout of Monte dei Paschi, Italy’s third largest bank by assets, and the world’s oldest bank (founded in 1472), seems crazy, it’s not in the short-run.
That’s because Too Big to Fail banks have been good bets every time they crash and burn and get bailed out by their governments and central banks.
However, beyond this latest market pop, Italian banks and big European banks are a dangerous bet.
All the news lately is focused on Banca Monte dei Paschi di Siena (MPS) because it has until the end of 2016 to recapitalize itself after failing European bank stress tests this summer.
In order to meet required capital standards, the bank put together a plan to raise €5 billion of cash and sell €28 billion worth of non-performing loans (NPL).
Part of the €5 billion in cash needed to bolster MPS’ equity capital is expected to come from Qatar’s Investment Authority, the country’s sovereign wealth fund and already a beleaguered investor in MPS. Underwriters of the equity offering hope a large investment by Qatar will spur other investors to pony up fresh cash.
As of today, Qatar hasn’t stepped up with any commitment of cash, which the offering’s syndicate of underwriters says partly constitutes “adverse market conditions†that relieves the underwriters of having to raise any money.
