Total chaos reigns in European banking stocks this morning as Monte Paschi shares crash, soar, and plunge amid on-again, off-again bail-in, bail-out headlines (and stocks and bonds hit record lows). However, Italy is now not alone as Spanish banks are also bloodbathing following a European Court ruling on mortgage fraud went against them.

As MishTalk.com’s Michael Shedlock explains, bondholder bail-ins are on the way in Italy as private investors pulled the plug on a bank rescue. Rome plans a €20 billion bank bailout, but under eurozone rules junior bondholders have to take a hit.

Please consider Italy braces for Monte dei Paschi Rescue.

On Monday night, Italy’s finance minister Pier Carlo Padoan confirmed Italy is readying a €20bn rescue fund for MPS and other weak lenders as the chances of a successful €5bn private recapitalisation of the Siena-based bank recede.

 

By the evening of Thursday at the latest, it should be clear whether MPS, which was founded in 1472, will have been rescued by the private sector via a €4.5bn debt-for-equity swap and funds from anchor investors including the Qatar Investment Authority. As of Monday only €200m had been committed to the swap, suggesting the chances of pulling off the rescue are slim, said people close to the deal.

 

MPS’s debt-for-equity swap will close at 2pm Italian time on Wednesday. If it goes badly MPS could already ask the government to step in, said one Italian official.

 

According to an Italian official only about €2bn of the €20bn will be used for liquidity guarantees, and the rest for recapitalisations and for compensating some retail bondholders. Other banks will be rescued on a case-by-case basis over the coming months now that Italy has its “bazooka”. The €20bn rescue fund will abide by EU rules on so-called burden-sharing, which force losses on junior bondholders.

 

Italy’s banks currently have one of the highest problem loan ratios in Europe at 16.4 per cent of total loans, more than three times the European average of 5.4 per cent, according to Moody’s Investors Services and data from the European Banking Authority.

 

Nicolas Véron, an economist and senior fellow at Brussels think-tank Bruegel, argues that “assuming reasonable competent handling, the entire Italian bank system may reach an adequate level capitalisation to allow it to start working out its bad loans by the summer of 2017”.

 

Adding to confidence, UniCredit, Italy’s only globally significant bank, is expected be able to raise €13bn in new capital on the private market next year, say investors.

 

Bankers say reforming a fragmented system, of more than 500 banks, with weak profitability requires deep cuts of between 50,000 and 150,000 jobs by some estimates.

Bail-ins Coming, Expect More

Italian officials and bankers argue a capital injection of €20 billion will be sufficient to stem concerns about Italy’s banks by allowing adequate provisions for bad loans weighing on its economic recovery.

I scoff at the notion €20 billion will come close to curing the problem. Italy’s banks have a combined €360 billion of nonperforming loans that they admit to.

 

It takes quite a stretch of the imagination to presume €20 billion “bazooka” will plug a €360 billion hole. To do so would require an unbelievable recovery rate on those nonperforming loans.

 

€20 billion will not be enough. Heck, €120 billion is probably not enough. And on top of it all, between 50,000 and 150,000 job cuts are coming.

 

Has anyone asked “How those 50,000 to 150,000 will pay their bills?”

For now the pain remains in BMPS with Unicredit and Sanpaolo ‘stable’…

And BMPS bonds have collapsed to record lows… pricing in a major haircut/bail-in…

But it’s not just Italy, Bloomberg reports that Spanish banking stocks fall after the European Court of Justice ruled that the May 2013 cut-off point for unfair home mortgage payment reimbursements is illegal.

Borrowers who paid too much interest on home loans pre-dating a May 2013 Spanish ruling on so-called mortgage floors are entitled to a refund from their banks, judges at the EU Court of Justice ruled in Luxembourg Wednesday.

 

The court said that a proposed time limit on the refunds is illegal and customers shouldn’t be bound by such unfair terms. Banco Sabadell SA fell as much as 7.5 percent, while Banco Popular slipped as much as 10.5 percent, the largest decliner in Spain’s Ibex 35 benchmark.

 

“This comes as a surprise and in a bad moment for Spanish banks as most of them would have to make extra provisions to pay for this,” Daragh Quinn, an analyst at Keefe Bruyette & Woods, said by phone. “It will mean pressure on capital generation and profits in the fourth quarter.”

 

The EU court case comes as Spanish banks are under pressure from low interest rates and weak demand for credit, affecting their traditional business of lending. With 521 billion euros, home loans are one of the largest parts of Spanish bank lending business as they grew their real estate exposure during a construction boom in the country that burst at the end of the last decade. Some banks are still making provisions for bad loans, which also adds pressure to profit.

Banco Popular Espanol shares fall 7%, Caixabank 3.2% and Banco de Sabadell 3.4%. Santander falls 1.25% and Bankinter by just 0.1%.

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