Italian banks test ‘safe hands’ Padoan

Posted on July 28, 2016

Italy's Finance Minister Pier Carlo Padoan waits for the start of an euro zone finance ministers meeting in Brussels, Belgium, July 11, 2016. REUTERS/Francois Lenoir©Reuters

Pier Carlo Padoan, Italy’s finance minister

Over dinner with reporters at an upscale Roman hotel in November, Pier Carlo Padoan, Italy’s finance minister, was asked what he would do if he had a magic wand to help his country’s sluggish economy.  

    The answer was telling: he would wipe away the huge stock of non-performing loans that had accumulated on the balance sheets of Italy’s banks during the recession.  

    Nine months later, the unassuming 66-year-old labour market economist is arguably facing the greatest challenge of his public career thanks to the turmoil enveloping Italy’s banking system — which has been driven by the very problem he pinpointed.  

    Saddled with €360bn of gross NPLs — including about €200bn of bad debts — Italian banks have been slow to boost lending to the Italian economy even as it recovered from a lengthy recession.  

    But crucially, investors have targeted them as the weakest link in the European financial system, prompting sharp falls in shares in Italian banks and raising the concern of officials around the world. 

    Mr Padoan has not relished the spotlight on Italy as a source of trouble for the global economy. At the conclusion of the meeting of G20 finance ministers and central bank governors in China last weekend he sought to soothe markets as best he could. 

    “There is no risk in terms of systemic stability,” he told reporters. “There are a few critical cases which are contained and [will be] resolved through a market process,” he added.

    This week will be pivotal. Under Mr Padoan’s direction, Italian officials are looking to engineer a private-sector cash injection into Monte dei Paschi di Siena, Italy’s third-largest bank by assets and the most likely to fall short of capital in Europe-wide stress tests when results are published on Friday.

    Weak growth is Italy’s fundamental problem

    This picture taken on July 1, 2016 shows the headquarters of Monte Dei Paschi di Siena bank on in Siena, in the Italian region of Tuscany. Italy's number-three bank, Banca Monte dei Paschi di Siena, took a hammering on the stock market on July 4, 2016 as the European Central Bank told it to slash its large bad-debt burden. Investors, many of them shaken by Britain's vote to leave the European Union, are fretting over the fragile balance sheets of debt-laden Italian banks. / AFP PHOTO / GIUSEPPE CACACEGIUSEPPE CACACE/AFP/Getty Images

    There is a limit to what EU partners can expect of Renzi for now

    But if such a “market solution” does not work, Rome will have to consider the much more politically perilous path of rescuing MPS with public money.

    This has already led to a round of high-stakes talks with Brussels over how to structure a rescue without violating tough EU rules on state aid. With few exceptions, these rules will require a hit to private investors, including junior bondholders, in the struggling bank.

    Italian officials are desperate to avoid that scenario as it could further dent support for Prime Minister Matteo Renzi’s government, raising the pressure even more on Mr Padoan.

    Mr Padoan, a former IMF and OECD official who was picked by Mr Renzi in 2014 to be finance minister, is known for his low-key style and familiarity with international institutions. To some, this cautious competence makes him ideal to manage Italy’s tricky economic and financial portfolio and mediate with Brussels. 

    “Padoan is a quiet leader. He listens to everyone, but when he talks, he talks, it’s for real,” says Filippo Taddei, the top economic adviser to the ruling Democratic party.  This temperament helps balance out some of Mr Renzi’s more outspoken — even brash — criticisms of EU policy. 

    “I don’t think it’s as co-ordinated as good cop-bad cop, I think it’s in their natures,” says Francesco Galietti, an analyst at Policy Sonar in Rome. 

    But others are less sure Mr Padoan’s skills quite match the moment, arguing that he should have been more aggressive and commanding in dealing with the banking problems — and instead, they festered.

    “The Monte dei Paschi di Siena issue should have been tackled immediately after the first comprehensive stress tests of the ECB in October 2014,” says Andrea Montanino, a director at the Atlantic Council in Washington. “He should have grabbed it by the horns right away so we didn’t get to this point.”  

    One sign of mounting impatience with Mr Padoan came last week when Francesco Boccia, a senior lawmaker from Mr Renzi’s Democratic party, said the finance minister was “not up to the task” of handling the banking woes.  “We need a definitive solution to safeguard the system,” Mr Boccia told the Il Fatto Quotidiano newspaper.

    But Italian officials say Mr Padoan did what he could under rigid regulatory constraints and mounting economic headwinds. Once it was clear that the door was shut in terms of any Spanish or Irish-style bad bank to swoop up the NPLs, he led efforts to set up a guarantee scheme to stoke private investment in NPLs and set up a private-sector fund to recapitalise some banks. 

    Meanwhile, Mr Padoan pressed ahead with structural reforms designed to improve Italian bank governance — especially small regional ones — by cutting their links to politicians and encouraging consolidation. He also backed bankruptcy and civil justice reforms to help speed up the resolution of disputes over bad debts.  

    Italian officials acknowledge that the banking crisis has involved a learning curve for Mr Padoan. “He is dedicating himself very much to the details — and even more so because it is a topic he has not dealt with this much in the past,” says one senior Italian official.  

    Should Italy plunge back into financial distress, Mr Padoan’s reputation could be in tatters. But if he succeeds, his already strong domestic stature could be further enhanced. Mr Padoan’s is consistently the country’s most popular cabinet minister, according to a survey by Ipr, and is sometimes mentioned as a possible leader of a caretaker government should Mr Renzi resign.  

    “His suits are awful and he can be very grumpy,” says Mr Galietti. “But this is someone who cares, he’s a safe pair of hands.” 

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