Currencies

Renminbi strengthens further despite gains by dollar

The renminbi on track for a fourth day of firming against the dollar on Wednesday after China’s central bank once again pushed the currency’s trading band (marginally) stronger. The onshore exchange rate (CNY) for the reniminbi was 0.28 per cent stronger at Rmb6.8855 in afternoon trade, bringing it 0.53 per cent firmer since it last […]

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Financial

Sales in Rocket Internet’s portfolio companies rise 30%

Revenues at Rocket Internet rose strongly at its portfolio companies in the first nine months of the year as the German tech group said it was making strides on the “path towards profitability”. Sales at its main companies increased 30.6 per cent to €1.58bn while losses narrowed. Rocket said the adjusted margin for earnings before […]

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Property

Spanish construction rebuilds after market collapse

Property developer Olivier Crambade founded Therus Invest in Madrid in 2004 to build offices and retail space. For five years business went quite well, and Therus developed and sold more than €300m of properties. Then Spain’s economy imploded, taking property with it, and Mr Crambade spent six years tending to Dhamma Energy, a solar energy […]

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Currencies

Nomura rounds up markets’ biggest misses in 2016

Forecasting markets a year in advance is never easy, but with “year-ahead investment themes” season well underway, Nomura has provided a handy reminder of quite how difficult it is, with an overview of markets’ biggest hits and misses (OK, mostly misses) from the start of 2016. The biggest miss among analysts, according to Nomura’s Sam […]

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Banks

RBS falls 2% after failing BoE stress test

Royal Bank of Scotland shares have slipped 2 per cent in early trading this morning, after the state-controlled lender emerged as the biggest loser in the Bank of England’s latest round of annual stress tests. The lender has now given regulators a plan to bulk up its capital levels by cutting costs and selling assets, […]

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Categorized | Banks

Renzi needs a banking plan that will work


Posted on June 30, 2016

Italy's Prime minister Matteo Renzi©AFP

Matteo Renzi

Matteo Renzi’s government faces many serious challenges. It is contending with sluggish economic growth and a European migrant crisis, while waging running battles with Brussels over its public finances. Mr Renzi is even fighting a potentially existential referendum over reforms to Italy’s political system. Yet the issue that may derail the centre left leader is the uncertainty engulfing his country’s banks.

After years of Italian governments dodging the problem, Mr Renzi is at least trying to confront it. He has already had one go this year, obliging a group of largely private institutions to inject €5bn into an optimistically named fund called “Atlas”, whose purpose is to recapitalise some of Italy’s ailing banks. This week, alarmed at the shockwaves rippling through the markets after the UK’s Brexit vote, Mr Renzi decided that this popgun was inadequate and rummaged for something more in the line of a bazooka. This would have involved him persuading his eurozone partners to allow Italy to inject €40bn into the sector in the form of direct state aid.

    Mindful of new EU rules on bank resolution, the European authorities have rebuffed Mr Renzi’s entreaties. But even had they not, it is hard to see even his larger scheme being enough to set the banks back on their feet.

    On Thursday, the Atlas fund announced that it would take control of Veneto Banca after an €1bn capital increase demanded by EU bank regulators attracted zero interest. That means the fund has already devoured more than half of its capital simply rescuing two midsized regional banks.

    The snag is that this barely scratches the surface. There are still €200bn of bad loans on Italian bank balance sheets — of which €85bn remains unprovided for. These numbers may grow if Italy’s still fragile economy is forced back into reverse by the shock of Brexit. Already they dwarf even the larger rescue plan for which Mr Renzi has been pushing. Analysts have estimated that the gap may amount to some €100bn.

    Mr Renzi’s concern is that cleaning up the banks while living within EU rules could provoke a political earthquake. To do so would require him to bail in bank bondholders whose ranks may include many retail investors. An attempt to do just this with four failing regional banks last year provoked a political outcry. It doesn’t help the premier that many of Italy’s weakest regional banks happen to be in areas dominated by the centre left.

    But Mr Renzi has neither the luxury of options nor of procrastination. The European Central Bank is poised to publish the results of its latest stress tests next month. These may result in further capital demands Italian banks are ill-placed to meet.

    Italy rescues Veneto Banca after bailout plea fails

    (L-R) French President Francois Hollande, German Chancellor Angela Merkel and Italy's Prime Minister Matteo Renzi address a press conference ahead of talks following the Brexit referendum at the chancellery in Berlin, on June 27, 2016. Britain's shock decision to leave the EU forces German Chancellor Angela Merkel into the spotlight to save the bloc, but true to her reputation for prudence, she said she would act neither hastily nor nastily. / AFP PHOTO / John MACDOUGALLJOHN MACDOUGALL/AFP/Getty Images

    Germany turns down Renzi’s request to ease rules during Brexit turmoil

    Mr Renzi’s concerns regarding retail investors are understandable. But he cannot allow these to hold up the strengthening of the financial sector nor the urgently needed consolidation of Italy’s myriad small regional banks. Forcing solvent institutions to bail out weaker ones by expanding the Atlas fund will not strengthen the whole system. Instead he should grit his teeth and go ahead with what resolutions are needed, while taking steps to protect the vulnerable. This could be achieved by compensating retail holders for any bail-in related losses on their bonds up to a certain monetary value.

    There are no easy options for Mr Renzi. He must somehow balance the needs of the financial system without trashing his party’s own popularity ahead of a crucial referendum. Italy’s EU partners should show some understanding. The consequences of continued inaction could be ugly indeed.