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Shaky Italian banks in focus at eurozone finance discussions

Published:Tuesday | July 12, 2016 | 7:00 AM
Italian Prime Minister Matteo Renzi.

Italy's partners in the 19-country Eurozone insisted Monday that new rules governing the rescue of imperilled banks will not be relaxed, especially at a time when Europe is dealing with the fallout of Britain's decision to leave the European Union.

Worries over the financial health of Italy's banks have grown more acute since the June 23 referendum result in Britain and the country's premier, Matteo Renzi, is looking for a way to rescue them from a pile of bad loans that aren't being repaid.

Many Italian banks have seen their share prices come under intense pressure since the vote. Italy's third-largest lender, Monte dei Paschi di Siena, has been ordered to sharply reduce its load of bad loans and has seen its share price slump by around a third since the vote.

However, any rescue attempt that involves the use of public money could run into resistance from the EU, which recently introduced new rules that are effectively designed for protecting taxpayers from such bailouts. During the region's debt crisis over the past few years, the parlous situation of some banks has been at the root of some of the bailouts, notably Ireland in 2010.

Taxpayer money can now only be used after bank creditors such as bondholders have been 'bailed in', meaning they lose some of their money before taxpayers chip in. That provision was aimed at keeping the costs of rescuing banks from overwhelming government finances.

NON-PERFORMING LOANS

Jeroen Dijsselbloem, the Eurozone's top official, conceded Monday that there are issues among Italian banks surrounding non-performing loans - in effect, loans that aren't going to be repaid - but said that wasn't anything new.

"It needs to be dealt with. It will have to be dealt with gradually," he said ahead of a meeting of the Eurozone's 19 finance ministers. "There will be no big solutions ... . It's not an acute crisis so that also gives us some time to sort things out."

Italian banks have been worn down by some €360 billion (US$400 billion) in loans that won't be paid back in full, as well as low interest rates, which squeeze the difference between bank borrowing costs and lending rates - their fundamental way of making money.

Dijsselbloem, though, ruled out any relaxation in the new rules governing the rescue of eurozone banks.

The "only thing to me that is very important is that we respect what we agreed between us because, otherwise, everything will be questioned in Europe, and there are a lot of questions in Europe already, so we don't need any more questions," he added.

"There have always been, and will always be, bankers who say we need more public money to recapitalise our banks, and I will resist that very strongly, because again and again, it's hitting on the taxpayer, again and again increasing sovereign debt in countries that are heavily indebted," he added.

Germany's influential finance minister, Wolfgang Schaeuble, echoed Dijsselbloem's view about the importance of respecting rules.

"We all know that the European rules that we created as a lesson from the financial and banking crisis is made to prevent repeats," Schaeuble said. "It offers sufficient possibilities to respond appropriately to every situation."

One problem in Italy is that about a third of bank bonds are held by small retail investors. Inflicting losses on them, as well as depositors, could be highly unpopular as Renzi faces a key referendum on constitutional reform in October. Using public funds to help the banks would diffuse the costs.

But that would also mean that the EU's hard-won banking union and bailout rules fail their first road test.

Italy's Finance Minister Pier Carlo Padoan sought to downplay concerns that have gripped investors recently arguing that they have been overplayed partly because of concerns over the impact of Britain's exit from the EU, or so-called Brexit.

"We live in times of volatility," he said. "We have been living in times of volatility for months now, including after Brexit."

- AP