State aid funding request as Italian political turmoil hampers rescue of the world's oldest bank
Italian government bond yields fell this weekend as Monte dei Paschi said it would request aid from a newly approved state fund to help struggling banks, after failing to win investor backing for a capital increase.
Ten-year yields slipped 4 basis points (bps) to 1.81pc in thin trading before the Christmas holiday.
Another banking saga concluded with Germany's Deutsche Bank agreeing to a $7.2bn settlement with the US Department of Justice (DOJ) over toxic mortgage securities sold in the run up to the 2008 financial crisis. The sum is nearly half the fine initially levied in September.
Elsewhere, Credit Suisse agreed to pay $5.3bn to the DOJ to settle similar charges, and Barclays became the latest in a long list of lenders under investigation to be sued.
But the focus for financial markets was Italy, where Monte dei Paschi said it would tap a €20bn government fund approved late last Thursday.
A spokesman for Eurogroup President Jeroen Dijsselbloem said last Friday that there must be a bail-in of private bondholders first before Monte dei Paschi receives state aid. The request from the world's oldest bank came after a private rescue was hampered by political turmoil caused by a referendum this month that led prime minister Matteo Renzi to quit.
With other Italian lenders looking fragile, the new administration of Paolo Gentiloni is looking to end a protracted banking crisis that has gummed up the economy.
"The situation in bond markets is reflecting the developments around Italian banks and investors are taking those well," Commerzbank strategist David Schnautz said.
Italian yields were the biggest fallers on Friday, with most other eurozone equivalents down 1-2 bps.
Milan's stock market rose around 1pc but trading in Monte dei Paschi's shares and bonds were suspended. Deutsche Bank's shares rose by more than 2pc.
Other Italian banks that may struggle to raise capital in coming months are Banca Popolare Di Vicenza, Veneto Banca and Banca Carige.
Researchers at Barclays said state intervention is unlikely to represent a systemic solution for Italy's banks, estimating the largest six Italian lenders could need about €30bn in total to clean up their balance sheets.
Meanwhile Italy's former premier Mario Monti told a forum in London that Mr Renzi's now-departed government was to blame for allowing the banking crisis to fester for so long. It wasted crucial time and political capital on a needless constitutional referendum that split the country.
Defenders of Mr Renzi said intransigent EU authorities made it worse by pushing matters to the brink, and the EU destabilised Italian banks with arbitrary stress tests and pro-cyclical capital rules that choked Italy's economy. The €20bn fund pushes sovereign debt to 134pc of GDP, deeper into uncharted territory. Rising global yields have hit Italy hard and imply losses on €400bn of government debt owned by Italian banks, eroding core capital levels.
The European Central Bank will start cutting its monthly bond purchases from €80bn to €60bn in March, and the programme expires at the end of 2017. Italy will no longer have a buyer of last resort mopping up its debt.
"Tapering leaves some countries in a naked position. They have taken too much comfort from the ECB umbrella," Mr Monti told the Official Monetary and Financial Institutions Forum.
Hanging over everything is the growing likelihood of early elections in mid-2017, opening the way for an unholy alliance of the Five Star Movement, the Lega Nord, and other eurosceptic groupings. Together they could command half the vote.
For now, Italy can breathe a sigh of relief, and the world's most ancient bank lives on to fight another century.
©Reuters (additional reporting Daily Telegraph)