Italian bank-rescue push falters as Merkel sticks to the rules

Bloomberg — Prime Minister Matteo Renzi’s efforts to shore up Italy’s struggling banks ran into a roadblock, as German Chancellor Angela Merkel insisted on sticking to the rules put in place since the financial crisis to prevent taxpayer bailouts.

“We can’t do everything all over again every other year,” Merkel told reporters after a European Union summit in Brussels on Wednesday. The bloc’s laws on the resolution and recapitalization of banks “offer enough leeway for the specific conditions in individual member states.”

“We know what we have to do on the banks and we’ll do it knowing it serves the country and respects European rules,” Renzi shot back shortly after Merkel had spoken. “We are not here to be given a lesson by the schoolteacher.”

The Italian government, which failed to gain EU backing for a bad bank earlier this year, has been sounding out other countries and the European Commission, the bloc’s executive arm, on ways to help its banks after their shares were hammered following the U.K.’s vote to secede from the bloc.

Renzi’s government is considering measures that may inject as much as 40 billion euros into banks, possibly by providing capital or pledging guarantees, according to a person with knowledge of the planning. Bank of Italy Governor Ignazio Visco told Il Sole 24 Ore that all available tools will be used to boost the country’s lenders.

Rescue Effort

Italian media have reported that the government in Rome is pursuing a six-month waiver of EU state-aid rules, allowing it to shore up banks without forcing investors to share losses.

The German government insists that EU rules on handling struggling banks should apply in any rescue effort, including forcing losses on shareholders and some creditors before public money can be injected, according ‘to a person with knowledge of the government’s stance’.

Any waiver of the rules would be complicated, as Germany insists that the EU’s Bank Recovery and Resolution Directive be applied, the person said. That will mean Italy must first avoid triggering a wind-down procedure. The assumption in BRRD is that the need for “extraordinary public financial support” for a bank indicates that a bank is “failing or is likely to fail, and therefore triggers the need for resolution,” according to the European Banking Authority.

Junior Creditors

Germany isn’t pushing for banks to be wound down, according to the person. The government does, however, want to ensure that private investors are tapped before any public money is put into the banks. EU state-aid rules normally require shareholders and junior creditors to share losses.

The government in Berlin rejects the argument that the U.K. vote to leave the EU constitutes an “exceptional circumstance” which, under EU basic law, can allow a national government to grant aid to a company outside of the state-aid rules.

Renzi said on Wednesday that he had “never asked to change the rules.”

“In the current situation, if there were problems we would be able under the current rules to protect the money of account holders and citizens,” he said.