As Italy seeks to recover from their recession, Prime Minister Matteo Renzi has focused his attention on how to repair the damaged banking system. With over 360 billion euros in bad loans, the Italian economy is looking for some way to re-energize the markets and create an environment that supports investment and capital projects. The Italian government made an agreement with the European Commission earlier this year, which allowed banks to bundle bad loans into securities for sale. While this allowed for some lessening of the pressure on the banking system, it was nowhere near a total solution. According to Bob Parker, a senior advisor at Credit Suisse, “The Italian banking system has been under-capitalized… and the economic impact has been negative because banks haven’t been strong enough to provide credit.”
The current solution in development: a backstop style fund named Atlante. The 5 billion euro fund will be backed by banks, insurers, and investors. To avoid violating European Union rules against providing state aid, Atlante will be privately managed by Quaestio Capital Management. The idea is that the fund will act as a buyer of last resort for banks that struggle to raise equity capital or can’t sell the riskiest of their bad debt. It is a good idea in theory. A recently released report, however, has dropped some details on Atlante that shows between 3 to 6 billion euros in existing commitments. So part of the problem, and where most of the criticisms are arising from, is that the fund is simply too small to speak to the issues it was designed to resolve. It’s akin to placing a small bandage on a gaping wound.
Since the announcement of the Atlante fund and the subsequent report on its scope and existing obligations, Italian markets have taken a hit. Intesa Sanpaolo dipped 4.1 percent, UniCredit SpA dipped 5.2 percent, and Italian Lenders have struggled on the Bloomberg Europe Banks and Financial Services Index. The question is, what will the country do in response to these recent losses given the investment in the new funds?
What further complicates matters is the question of whether or not Brexit will come to pass. If the UK leaves the European Union, the continent may yet see even greater economic woes. Last month, Banco Poplare SC and Banca Popolare di Milano Scarl merged through an all stock deal to form the third largest bank in Italy, the biggest transaction since 2007. This could be a sign of good fortune on the horizon. As Bob Parker had previously stated the banking system had not been strong enough. But with a larger infrastructure and more capital projects, Italy could be on the path to recovery. But what most leaders in the industry know is that the banking system does require a complete reboot, which will take a significant amount of time and a significant amount of investment. It is certainly not something that will happen in the country overnight.