According to an EU official, the liquidity support program includes up to €150 billion ($166 billion) in government guarantees. The WSJ adds that the commission spokeswoman declined to comment on the amount of guarantees that were authorized, but said that the budget requested by the Italian government had been found to be proportionate. The Italian economy ministry declined to comment.
An amusing sidebar: « only solvent banks would qualify for the liquidity support program, which has been authorized until the end of the year. » The problem is that with €360 billion in NPLs, every bank in Italy is insolvent, which implicitly means that they will all be found to be solvent or otherwise nobody will benefit.
And while Angela Merkel apparently shut down the original proposal pitched by Italy, Europe – surely under the guidance of Mario Draghi – has found a way to circumvent her veto power.
“As this decision and other precedents demonstrate there are a number of solutions that can be put in place in full compliance with EU rules to address market turbulence,” the spokeswoman said.
To be sure, Italy’s market has indeed been turbulent: Italian banks have lost more than half of their market capitalization since the beginning of the year, as investors fret about the lenders’ huge exposure to bad loans. That compares to an average decline of less than one third for European lenders. Some Italian banks have seen their shares drop by some 75%.
A person familiar with the Italian government plans said the cabinet of Prime Minister Matteo Renzi hoped to use a liquidity backstop to contain investor panic, which could result in a run on deposits and affect banks’ liquidity.
Needless to say, for Italy’s Prime Minister to be contemplating how to avoid « investor panic » and prevent a « run on deposits« , then Italian banks must truly be on the verge of collapse.
What this statement really means, and whether a preemptive plan to bailout Italy’s insolvent banks will « boost confidence », we leave up to readers decide.