Back door bailout for the Italian banking sector
Peter Walden, News Editor
12 Apr 2016, 9:48 a.m.
Italian politicians and banking executives have agreed to create a 5 billion euro fund to protect the Italian banking sector and stop a full blown crisis. The fund will allow stressed banks to offload defaulting loans and raise capital.
The Italian government is desperate to restore confidence in the sector which has been plagued by under-performing loans. Share prices in the country’s leading financial institutions have plummeted and their credit spreads have widened as investors headed for the exits.
Earlier in the year the Italian government reached an agreement with the European Commission to allow banks to package up their defaulting loans into tradeable securities. Importantly these securities have an inbuilt state guarantee to attract investors. It appears history is repeating itself as this latest attempt to shore up the system seems very similar to the mortgage backed security scandal which brought the financial system to its knees.