European View

EU approves €150 bn precautionary backstop for Italy’s banks

by Beda Romano

The European Commission authorized Italy to issue public guarantees to banks raising liquidity from the market. The “precautionary” measure will be used only in case of sudden lack of liquidity, but it confirms the delicate situation of the banking sector. In Bratislava, Slovak Finance Minister Peter Kazimir, who from today holds the six-month presidency of the Ecofin, said he was confident about Europe's financial stability.

In a statement, the EU executive arm confirmed the authorization was given to Italy last weekend, three days after the results of the UK vote to leave the European Union. Britain's decision sparked volatility in the financial markets, hurting especially Italian banks with high levels of nonperforming loans.

The program cleared by Brussels is valid for six months, until the end of the year.

Public guarantees can be used by banks to facilitate funding on the market in case of a crisis of liquidity. Under EU rules, the guarantees are an exception to state aid rules, and can only be granted to solvent banks. “The scheme proposed by the Italian government is considered in line with the guidelines on state aid to banks,” a EU spokesman said.

The guarantees are worth €150 billion, according to unconfirmed reports in Brussels. In a short statement yesterday, the Commission explained that the measure is “precautionary.”
“There are no expectations that the scheme must be used,” a spokesman said.

At the peak of the financial crisis, almost all countries benefited from this solution. Today, five countries are adopting it, notably Italy, Cyprus, Portugal, Poland and Greece.

The announcement came at a very delicate moment for the financial markets and the Italian banking sector, as thegovernment negotiates with the European Commission the eventual recapitalization of banks in difficulty. The negotiations are difficult because injections of public money in banks' capital are allowed only in exceptional circumstances and at specific conditions.

The decision announced yesterday “shows there are several solutions that can be used in line with EU rules to respond to market turbulence,” the Commission said.

The remark is not without importance. The negotiation of a large package of measures to support the banking sector is complicated because of Rome's contentious requests. Not everybody in Brussels believes the situation is so exceptional to allow the use of EU flexibility.

In Bratislava, Kazimir denied there were risks to financial stability. “We will survive to this situation (…) After the initial selloff, prices have gone higher,” the minister said.

Asked whether there is room to review the rules on capital requirements, he said: “The Italian view of the directive known as BRRD is not only related to Brexit. We know this is an important issue for Italy. Honestly, I don't see room for further exceptions” to those already allowed by the rules.

Kazimir – who as president of the Ecofin wants to promote projects like the banking union, the budgetary capacity of the eurozone and the financial parachute for the bank resolution fund – Brexit will not “have a negative impact on the European economy.”

Meanwhile, in Brussels, the vice president of the European Commission, Valdis Dombrovskis, said “the immediate priority is to calm the markets and restore confidence.”