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CommentLeader

You’re only supposed to bail the bloody bonds in

Italian non-performing loan securitizations will now come with a government guarantee, after months of negotiations between the state and the European Commission resulted in a rather rosy outcome for the country’s banks this week.

Those banks, and their creditors, should be the only ones celebrating this particular Italian job.

The Commission finally got on board with the plan because it apparently satisfies EU state aid rules, as the Italian government is selling its protection at the “market rate”. Nonsense.

If this amount of guarantee was obtainable from the private sector at the same price, there would be no need for the government in the first place.

With Italy’s NPL outlook supposedly on the turn, there would be a queue of private institutions willing to pick up the fees on such insurance, if the price was right.

The banks are happy, because they will be able to sell soured assets at a price more acceptable to them, and thus not realise the true extent of their losses on poor lending, something they have been trying to avoid for years.

Politicians and regulators have talked a much better game on burden sharing since 2012, with the Financial Stability Board’s Total Loss-Absorbing Capacity (TLAC) rules billed as the final nail in the coffin for ‘too big to fail’.

But they don’t walk the walk. When any issue arises they revert to the tried and tested path of least resistance, which is government support.

The Bank Recovery and Resolution Directive, which took effect on January 1, was supposed to be the EU’s ironclad rulebook that would ensure creditors shared in bank losses.

If investors are worried about the €350bn of bad loans on Italian banks’ books, then banks should confront those concerns by working out the true value of their assets.

If there is then a problem, that is exactly what the BRRD, and its handy bail-in tool, are for. There will never be a good time to wind up a failing lender. There will always be a risk of “destroying market confidence”.

But each time governments provide undue support, they merely make the next time more acceptable.

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