Spanish Banking Crisis Spreads As Banco Popular Credit Curve Inverts

Having told its employees "don"t panic" over the weekend (at the crashing stock and bond prices of Spain"s 6th largest bank), it appears investors are ignoring that message as Banco Popular"s credit curve has inverted for the first time since 2012 in the biggest red flag yet that Spain"s banking crisis is systemic and about to test the EU"s bail-in laws.

Banco Popular Chairman Emilio Saracho sent a letter to staff assuring them the bank remains solvent after Friday"s stock crash, courtesy of Expansion, google translated:

"From the management we are aware that the information that is being published affects the work and the spirit of each one of you, but our obligation as professionals is to focus on the day to day and on the clients, since the activity of the bank must continue as it has so far" begins the statement, whose target is the Professional Association of Directors Banco Popular.

The central message of this letter sent yesterday is the following: "Banco Popular remains solvent and has positive net worth".

"Our bank is in a difficult situation," says Saracho. "For this reason and in order to meet the regulatory requirements that the European Central Bank demands for next year and guarantee our strength and future, we are working on different alternatives.

"Our customers and our shareholders are the most important thing for us, and for this reason we must send them a message of confidence and confidence that we are making every effort to overcome this situation," the letter concludes.

In short, Saracho urged the bank"s group of 1,800 managers to continue working hard; saying business activity should go on as normal, and that it was important to instill confidence in clients and shareholders. Unfortunately, one look at the bank"s recent surge in default risk as seen in its senior bond CDS, suggests that "those who panic first", may be doing the smart thing.. and now the curve has inverted (lower pane) for the first time since 2012"s crisis peak...

As WolfStreet.com"s Don Quijones asks (and answers), has the time finally come to test the EU’s bail-in law?

The shares of Spain’s sixth biggest bank, Banco Popular, plunged 36% last week to €0.43, reducing the bank’s market capitalization to €1.7 billion. Just three weeks ago, when there was still a glimmer of hope that things could be turned around, it was worth almost double that. Its shares traded at €15 ten years ago, before the collapse of Spain’s mind-boggling housing bubble that left Popular holding billions of euros of real estate assets.

Popular may not be a systemically important institution, but it’s nonetheless an institution of great import. It has the largest portfolio of small business customers in Spain and enjoys the patronage of one of Spain’s most influential institutions, Opus Dei. Its well-heeled members are among the bank’s most important shareholders and investors, and they stand to lose a lot of money if a last-minute buyer is not found soon.

This is an outcome that can no longer be discounted, especially after reports emerged on Thursday that senior officials of the ECB’s regulatory arm, the Single Supervisory Mechanism, had warned the bank could be wound down if it fails to find a buyer. But the EU agency charged with overseeing bank failures later issued a statement saying it “never issues warnings about banks.”

But the damage has already been done. And it’s not just Opus Dei, or Popular’s thousands of long-suffering retail investors, that could end up paying a heavy price. Popular’s investors also include PIMCO, one of the world’s largest asset managers, which owned €279 million of Popular’s outstanding €1.25 billion of face value in AT1 bonds at the end of March, making it by far the largest holder at the time.

These AT1 bonds go by another more familiar name: contingent convertible bonds, or Co-Co bonds. These are financial instruments that pay high coupons, because they come with a high risk, designed as they are to absorb losses at times of distress, by converting to equity or being written down when the lender’s capital ratio falls below a certain point.

Popular’s second batch of Co-Cos, worth €750 million, dropped to 59 cents on the euro, the lowest point ever reached by a bank Co-Co bond.

So far, despite their high-risk nature, no AT1 bond has ever been bailed in. But Popular, as a mid-sized bank that has arguably exhausted all its possibilities of resurrection, is in a terribly weak position.

“It would be the first triggering of an AT1,” Lloyd Harris, an analyst at Old Mutual, told the FT. “These types of events are more likely for Popular than they ever were for Deutsche Bank,” he added, referring to Deutsche Bank’s Co-Cos that got trampled last year.

If a triggering occurs, PIMCO and other investors would take a hit. If Popular were wound down, many more wealthy global investors, particularly in Latin America, would also be hit hard. They include the Luksic, Chile’s richest family, which bought 3% of Popular’s shares at the beginning of May in an operation then valued at €87 million. It’s now worth little over half of that. Another investor that stands to lose big time is the Mexican billionaire Antonio del Valle, who invested €450 million in Popular in 2013.

In recent weeks rumors have abounded that a loose consortium of Latin American investors is planning to take over the bank, once its share price has tanked low enough. But for the moment, they are just rumors.

By now, the only bank that appears to still have a passing interest in buying Popular is Spain’s biggest bank, Santander, which would like nothing more than to get its hands on Popular’s retail business, in particular that massive portfolio of small business clients. But for that to happen, Popular’s over €30 billion of impaired real estate assets would have to be neutralized, almost certainly involving taxpayer funds. Something would also have to be done to nullify the class action law suits mushrooming on the other side of the Atlantic over Popular’s alleged misleading of investors in the lead-up to its last capital expansion, in 2016 (What’s the matter with these investors that bought the capital-expansion hype? Don’t these people read WOLF STREET?)

The big question is whether the ECB and the European Commission would lend their approval to such a takeover, especially if billions of euros of public funds are required. Having just awarded Italy’s Monte dei Paschi a last-minute reprieve, prompting accusations that even banks that are not too big to fail are still getting bailed out in Europe 10 years after the financial crisis, they may feel that the time has finally come to test out the EU’s bail-in law.

And if they do, a lot of investors, rather than taxpayers, could end up losing their shirts, which would be a welcome change, while market players may even begin questioning just how safe Spain’s saved banking system really is. By Don Quijones.

Banco Popular “itself cannot at this point make a rough calculation” of what its value is, “and if they can’t, neither can we.” Read…  Banco Popular’s Co-Co Bonds Plunge as Balance Sheet Chaos Revealed in Potential Forced Sale

Stunning: Italy says NO to bail-in scenario’s

Whereas most bank clients accepted a bail-in as one of the risks associated with depositing cash on a bank account, Italy doesn’t seem to be too sure about forcing its banks to do so.

We all know the never-ending issues related to Banca Monte Dei Paschi, but that bank wasn’t Italy’s only problem. Two smaller banks, Banco Popolare di Vicenza and Vento Banca also need to be rescued. Although these banks are definitely smaller than Monte Paschi, and wouldn’t have a huge impact on the international banking system, it definitely is an issue which has to be solved.

Source: economist.com

According to the European Commission, both banks would need to find a 1 billion Euro cash injection from the private markets before the Italian government would be allowed to even think about providing additional state aid, but as you can imagine, there isn’t a lot of risk capital available for two failing banks.

The main question now is whether or not the state-supported Atlante-fund could be considered to be a private cash injection. If that would be the case, the state fund could inject the required billion Euro, and then let the Italian government deal with the mess. But Atlante has already ‘invested’ 3.4B EUR (investing might be a bad choice of words, as we don’t think putting money in a failing bank is an investment but rather a ‘speculation’) in both Venetian banks, and might be unwilling to throw more cash at it. Additionally, the larger banks in the country (Intesa SanPaolo and Unicredit) have publicy confirmed they aren’t willing to throw (more) good money at the failing banks, so they won’t be part of any solution.

Source: thecorner.eu

Not only is there a very thin line between considering a state-supported investment vehicle to be ‘private’ money and thus meeting the requirement of the European Commission, it’s also uncertain what the punishment for Italy would be if it wouldn’t apply the European rules to this situation.

After all, the Italian government seems to be radically against a bail-in of debt holders and account holders, even though this is the preferred (read: ‘mandatory’) solution of the European politicians.  The Italian government thinks a bail-in might make things even worse, as the fears of this bail-in might spread to other banks and other institutions inside the Italian system.

A very valid assumption, but this puts Italy on collision course with the other European countries and the ECB which have been pushing the member states towards using a bail-in as a first solution. And with a capital hole of in excess of 6B EUR, there simply isn’t a clear solution for the Venetian banks. After all, who’d be willing to invest that much money in failing banks?

Source: bsic.it

The 6.4B EUR might actually be just the starting point. Italians aren’t stupid, and several deposit holders have already started to empty their accounts. We aren’t talking about a ‘pure’ bank run, but the amount of money which is needed now might be just a very temporary solution. If more deposit holders withdraw cash, more money will be needed to protect the capital ratios of the two banks.

So whilst we acknowledge there’s no easy solution, something will have to be done. And if Italy refuses to apply the bail-in principles, the European Union and the Eurozone might have bigger issues than you’d think…

A new fundamental crisis seems to be just around the corner!

!! Click here to read our Guide to Gold !!

Here’s Why Italy’s Banking Crisis Has Gone Off The Radar

Authored by Don Quijones, Spain & Mexico, editor at Wolf Street

Here’s Why Italy’s Banking Crisis Has Gone Off the Radar

For a country that is on the brink of a gargantuan public bailout of its toxic-loan riddled banking sector, or failing that, a full-blown financial crisis that could bring down the European financial system, things are eerily quiet in Italy these days. It’s almost as if the more serious the crisis gets, the less we hear about it — otherwise, investors and voters might get spooked. And elections are coming up.

But an article published in the financial section of Italian daily Il Sole lays out just how serious the situation has become. According to new research by Italian investment bank Mediobanca, 114 of the close to 500 banks in Italy have “Texas Ratios” of over 100%. The Texas Ratio, or TR, is calculated by dividing the total value of a bank’s non-performing loans by its tangible book value plus reserves — or as American money manager Steve Eisman put it, “all the bad stuff divided by the money you have to pay for all the bad stuff.”

If the TR is over 100%, the bank doesn’t have enough money “pay for all the bad stuff.” Hence, banks tend to fail when the ratio surpasses 100%. In Italy there are 114 of them. Of them, 24 have ratios of over 200%.

Granted, many of the banks in question are small local or regional savings banks with tens or hundreds of millions of euros in assets. These are not systemically important institutions and can be resolved without causing disturbances to the broader system. But the list also includes many of Italy’s biggest banks which certainly are systemically important to Italy, some of which have Texas Ratios of over 200%. Top of the list, predictably, is Monte dei Paschi di Siena, with €169 billion in assets and a TR of 269%.

Next up is Veneto Banca, with €33 billion in assets and a TR of 239%. This is the bank that, together with Banco Popolare di Vicenza (assets: €39 billion, TR: 210%), was supposed to have been saved last year by an intervention from government-sponsored, privately funded bank bailout fund Atlante, but which now urgently requires more public funds. Their combined assets place them seventh on the list of Italy’s largest banks.

Some experts, including the U.S. bank hired last year to save MPS, JP Morgan Chase, have warned that Popolare di Vicenza and Veneto Banca will not be eligible for a bailout since they are not regarded as systemically important enough. This prompted investors to remove funds from the banks, further exacerbating their financial woes. According to sources in Rome, the two banks’ failure would send shock waves through the wider Italian financial industry.

There are other major Italian banks with Texas Ratios well in excess of 100%. They include:

• Banco Popolare (the offspring of a merger of Banco Popolare di Verona e Novara and Banca Popolare Italiana in 2017 and then a subsequent merger with Banca Popolare di Milano on 1 January 2017): €120 billion in assets; TR: 217%.


• UBI Banca: €117 billion in assets; TR: 117%


• Banca Nazionale del Lavoro: €77 billion in assets; TR: 113%


• Banco Popolare Dell’ Emilia Romagna: €61 billion in assets; TR: 140%


• Banca Carige: €30 billion in assets; TR: 165%


• Unipol Banca: €11 billion in assets; TR: 380%

In sum, almost all of Italy’s largest banking groups, with the exception of Unicredit, Intesa Sao Paolo and Mediobanca itself, have Texas Ratios well in excess of 100%.

But, as Eisman recently pointed out, the two largest banks, Unicredit and Intesa Sanpaolo, have TRs of over 90%. As long as the other banks continue to languish in their current zombified state, they will continue to drag down the two bigger banks. And if either Unicredit or Intesa begin to wobble, the bets are off.

To stay on the right side of the solvency threshold, Unicredit has already had to raise €13 billion of new capital this year and last week it took advantage of the ECB’s latest splurge of charitable lending (formally known as TLTRO II) to borrow €24 billion of free money. But as long as the financial health of the banks all around it continues to deteriorate, staying upright is going to be a tough order.

This is where things get complicated. In order to qualify for public assistance, banks must be solvent. Presumably, that would automatically disqualify any bank with a Texas Ratio of over 150%, which includes MPS, Banco Popolare, Popolare di Vicenza, Veneto Banca, Banca Carige and Unipol Banca. The bailout must also comply with current EU regulations including the Bank Recovery and Resolution Directive of Jan 1, 2016, which specifically mandates that before public funds are injected into a bank, shareholders and creditors must be bailed in for a minimum amount of 8% of total liabilities, as famously happened in the rescue of Cyprus’ banking system in 2013.

The Italian government knows that this approach could end up wiping out retail investors (otherwise known as voters) who were missold, in many cases fraudulently, subordinated bonds by cash-hungry banks in the wake of the last crisis, in turn wiping out the government’s votes. To avoid such an outcome, the government has proposed compensating those retail bondholders with public funds, just as the Spanish government did with the holders of preferente bonds. Which, of course, is in direct contravention of EU laws.

So far, the European Commission has stayed silent on the issue, presumably in the hope that the resolution of Italy’s financial sector can be held off until at least after the French elections in late April, if not the German elections in September. Then, if those elections go Brussels’ way, a continent-wide taxpayer funded bailout of banks’ NPLs can be unleashed, as already requested by ECB Vice President Vitor Constancio and European Banking Authority President Andrea Enria.

With no guarantee that Italy’s NPL-infested banks can hold out that long, it’s a dangerous waiting-and-hoping game. In the meantime, shhhhhhhh… By Don Quijones.

The Italian Bank Run: Monte Paschi Capital Shortfall Surges 75% To €8.8Bn Due To "Rapid Liquidity Deterioration"

While the big news last week was that Italy"s third largest bank, Monte Paschi, had been nationalized after JPM destroyed the bank"s chances of securing a private-sector rescue, and that Italy would issue up to €20 billion in public debt to fund the bailout of this, and other insolvent Italian banks, it appears there may be more moving parts to the story.

Recall that as we warned, the biggest danger for both Monte Paschi, and Italy"s banking system in general, is that retail depositor confidence in the Siena bank is shaken enough to lead to a bank run either in the world"s oldest bank, or worse, across the entire Italian banking sector, leading to a worst case probability outcome of falling bank dominoes as bank funding needs explode, resulting in even more deposit outflows, and so on in a toxic feedback loop.

To be sure, Monte Paschi"s deposit run is hardly new, and as the bank itself admitted last week, it had already suffered roughly €14 billion in deposit outflows, or 11%, in the first nine months of the year as shown in the chart below.

It turns out that  the bank run not only continued but accelerated.

As Reuters reports this afternoon, the ECB has told Monte dei Paschi it needs to plug a capital shortfall of €8.8 billion, 76% greater than the previous €5 billion gap estimated by the bank, and which hole the entire recently failed bank recapitalization was aimed at plugging, the lender said on Monday.

Meanwhile, for those who missed the last few episodes in the dramatic third bailout, and nationalization, in as many years involving Monte Paschi, here is a recap from Reuters:

Last Friday the Italian government approved a decree to bail out Monte dei Paschi (BMPS.MI) after Italy"s No. 3 lender failed to win investor backing for a desperately needed 5 billion euro capital increase. The bank said on Monday it had officially asked the ECB last Friday for go ahead for a "precautionary recapitalisation".

A precautionary recapitalisation is a type of state intervention in a struggling bank that is still solvent. It means only a modest bail-in of investors though the government can buy shares or bonds only on market terms endorsed by EU state aid officials in Brussels.

In its reply, the ECB said it had calculated the capital it believed the bank needed on the basis of a shortfall emerging from European stress test of large lenders earlier this year. In those tests Monte dei Paschi was the only Italian bank to come short under an adverse scenario.

The ECB said the lender was solvent but signaled the bank"s liquidity position had rapidly deteriorated between the end of November and December 21, Monte dei Paschi said.

In other words, depositors yanked even more billions from the bank - a perfectly reasonable course of action in light of concerns about the bank"s viability - which in turns has led to an even worse liquidity situation at Monte Paschi.

The Siena bank said that it "has quickly started talks with the competent authorities to understand the methodologies underlying the ECB"s calculations and introduce the measures for a precautionary recapitalisation..."

The bank"s problems date back several years but successive Italian governments have failed to tackle the issue, which became a political taboo this year with new EU rules banning state bailouts unless private investors take losses first. The European Commission said on Friday it would work with Rome to establish conditions were met for a bailout of Monte dei Paschi.

But on Monday ECB policymaker Jens Weidmann said plans for a state bailout of Monte dei Paschi should be weighed carefully as many questions remain to be answered. In an interview with Bild, the Bundesbank head said the bar should be high for government funds being used for bank as these are intended as last resort. He added that the planned Italian government measures can only be directed to banks that are healthy “in their core.” He also joined S&P in warning that the raised rescue funds may not serve to cover for foreseeable losses and that if government funds are used, there should be matching public funding because of Italy’s high government debt. There won"t be as the whole point of the exercise is to avoid angering the public by impairing its investments.

Italy"s market watchdog Consob said last week the bank"s shares and securities would be suspended from trading until the conditions of a state bailout become clear.

Monte Paschi Launches Share Sale To Avoid State Rescue As Germany Warns Against Taxpayer Bailout

In a last ditch attempt to avoid a state bailout, on Monday Italy"s Monte Paschi will begin a share sale process as it aims to complete a capital raise of €5 billion ($5.2 billion) before Christmas, Bloomberg reported overnight. The bank will canvass institutional investor interest through Thursday, while the offer for retail investors will end on Wednesday. As the lender didn’t provide terms of the offer, the price and total number of shares to be sold will be determined based on investor demand and on the outcome of the separate debt-to-equity swap which started last week.

The bank"s CEO Marco Morelli, who took over in September, is scrambling to find financial backers in his effort to clean up the bank’s balance sheet which continues to corrode under the weight of rising non-performing loans. A failure to recatpialize the bank would be a blow to Italy’s sputtering efforts to revive a banking industry that’s burdened with about €360 billion in troubled loans, dragging down the economy by limiting lending.

In the share sale, Bloomberg notes that 35% will be offered to individual investors and 65% to institutional investors, including potential anchor investors such as Qatar whose interest in a private bank bailout dwindled following the unexpected outcome of the Renzi constitutional referendum. As part of the rights offering, existing shareholders will be offered a chance to buy 30% of the offering reserved for retail investors before the sale is open to others.

The lender last week extended a debt-for-equity swap, one of the three main components of the bank’s capital-raising plan. The bank also plans a cash infusion from anchor investors and a share sale. Some more details:

The offer, involving the exchange of about 4.5 billion euros of Tier 1 and Tier 2 securities, is set to end at 2 p.m. on Wednesday. Monte Paschi, facing a Dec. 31 deadline to complete the fundraising, also will promote an exchange on 1 billion euros of hybrid securities issued in 2008 known as FRESH at 23.2 percent of face value, the lender said in a filing on its website.

In the previous swap offer, bondholders have already agreed to exchange about 1.02 billion euros for shares.

Should the share offering succeed and the recapitalization be completed, some €28 billion of bad loans would be securitized and sold to investors by the bank"s underwriters, removing them from Monte Paschi’s balance sheet. The capital being raised would be used to cover the bank for losses it would book in selling the troubled loans. If the sale fails, the conversions of debt-to-equity would be nullified.

Should the bank fail to raise the needed cash, and the private capital increase isn’t successful, the bank would have to seek aid from the Italian government. Under European banking rules, any losses must be imposed on bondholders if taxpayer money is used. The state is discussing a so-called precautionary recapitalization that would potentially limit bondholder losses.

Earlier today, Italy"s Il Sole 24 reported that Italy has prepared a plan to inject as much as €15 billion in state funds to sustain banks that could be approved this week, even if Monte Paschi succeeds in increasing its capital, in a further attempt to shore up confidence in Italy"s ailing banking sector.  The plan would help other troubled banks including Veneto Banca, Popolare di Vicenza and Carige.

Meanwhile, Germany once again voiced its reservations against a state bailout in a "worst case" scenario when Merkel aide Christoph Schmidt warned again against a taxpayer rescue of Monte Paschi.

"The restructuring of the bank should be achieved under the agreed rules, meaning the creditors must contribute to its rescue, not the taxpayers,” Schmidt, head of German Chancellor’s council of independent economic advisers, said in abstract of interview to be published Monday by Westdeutsche Allgemeine Zeitung.

Schmidt said that Italy’s effort to solve its banking crisis is key test for European banking union, and added that Italy must push for necessary reforms, warning that a lack of reforms in Italy could pose threat to euro area.

Which means that in the otherwise quiet pre=Christmas week, all eyes will be on Monte Paschi, and specifically the intentions of the alleged anchor investor, Qatar (and perhaps a handful of Chinese banks), to determine if Italy"s banking crisis is "fixed" if only for the near future, or if the new year is set to begin with another "risk flaring" episode out of the Italian banking sector as Monte Paschi"s bailout once again morphs into a political scandal and the biggest headache for Italy"s brand new government.