Italy, which failed to gain European Union approval for a bad bank just months ago, is considering ways to inject funds into some of its lenders after the U.K.’s vote to leave the trade bloc sparked a fresh selloff, according to people with knowledge of the talks.
The government is weighing measures that may add as much as 40 billion euros ($44 billion), said one person, asking not to be identified because the talks are private. The government may support lenders by providing capital or pledging guarantees, said the person. The amount is still under discussion and no final decision has been taken, according to the people.
“Tactically this is the time to push EU partners to approve their plans, which would otherwise probably meet with many objections,” said Marc Ostwald, a strategist at ADM Investor Services International Ltd. in London. It’s unlikely to ease the “already colossal task of bank balance-sheet resolution.”
Italy’s government earlier this year was forced to water down plans for a publicly funded bad bank on EU resistance, instead creating a smaller fund backed by lenders and investors to help stabilize the financial system and speed up consolidation. Governments are able to provide funds directly to banks under exceptional circumstances of systemic stress without breaching state-aid rules, a scenario that may apply to Brexit, the people said.
Italy’s Il Fatto Quotidiano reported the deliberations earlier on Monday.
Lenders extended declines on Monday, with UniCredit SpA, Italy’s biggest bank, down 8 percent at 4:22 p.m., and Intesa Sanpaolo SpA dropping 12 percent. The 39-member Bloomberg Europe Banks and Financial Services Index decreased 8.2 percent.
Italian banks, hurt by 360 billion euros of non-performing loans, sluggish economic growth and record-low interest rates, are under pressure to clean up their balance sheets and restore investor confidence. The country was among the hardest hit by Friday’s market rout that wiped $2.5 trillion from global equity values, with some of Italy’s largest banks dropping more than 20 percent.
Prime Minister Matteo Renzi has been pushing a package of reforms to modernize Italy and spur growth since he took office in February 2014. He has pressed lenders to become joint-stock companies, encouraging mergers to help reduce duplication and boost profitability and pushed the creation of Atlante, which can invest in bank capital and their bad loans and reduce bad debt.
“The Italian banking sector’s worries are far from resolved,” said Jan von Gerich, a strategist at Nordea Bank AB in Helsinki. “The outlook for Italian banks was clouded even before Brexit and the new worries Brexit has created for the banking sector in general further darken the outlook.”
Government and Bank of Italy representatives met over the weekend to discuss proposals, while also holding informal meetings with the European Commission, the people said. Italian authorities are monitoring markets and a decision on possible measures to support banks will be taken in the next few days, they said.
The injection could be financed through government debt issuance, Il Fatto Quotidiano reported, citing undisclosed sources.
Investors would welcome a state-funded recapitalization unless European rules first force them to impose losses on bondholders, according to Martin Nybye, the head of corporate-bond investments at Danish lender Jyske Bank AS.
“It should be a good thing,” he said. “If European growth is going to deteriorate from here, those non-performing loans aren’t going to perform any better. But the banks will want to know before they take this money that it will not trigger bail-ins of creditors.”
European state-aid rules and post-financial crisis bank regulation makes it more difficult for taxpayers to provide funds for troubled banks without investors first suffering losses. That’s a particular problem in Italy, where many bondholders are households and small investors.
Retail bondholders suffered losses at four small banks in November when they were rescued by the Italian bank resolution fund. That led to protests by savers, a nationwide selloff of bank bonds and at least one suicide. Italian households own 187 billion euros of bank bonds, based on the latest Bank of Italy data.
“They’ve rather seized the moment to attempt a 40 billion-euro fix on their broken banking system while Europe’s back is turned,” Bill Blain, a strategist at brokerage Mint Partners in London, wrote in a note to investors.
The aftershocks of the U.K.’s referendum reverberated across global financial markets, with the pound extending its selloff and European equities dropping to levels last seen in February. Some of the region’s largest banks including Deutsche Bank AG and Credit Suisse Group AG, hit fresh record lows on Monday, according to data compiled by Bloomberg.
Still, so far, the government’s measures have failed to reassure investors, with UniCredit down about 62 percent this year. Intesa has lost 49 percent of its value in that period, while Banca Monte dei Paschi di Siena SpA decreased 66 percent.
“In Italy, a 10 percent fall in the stock market following the Brexit vote clearly signals the country’s vulnerability to a full-blown banking crisis,” George Soros, the billionaire whose 1992 wager against the pound made hedge fund history, said in an opinion piece for Project Syndicate published last week.
By Sonia Sirletti & Tom Beardsworth