The world’s oldest bank imperiled

The ECB influenced European markets continue to show resilience against data flowing from the real economy. Italy managed to sell €4bn worth of 2 year paper and €2,62bn worth of 5 year paper at significatly lower yields than previous auctions. In the meantime, however, Italian business lobby group Confindustria predicted that Q4 GDP was down 0.6% QoQ and ISTAT announced that consumer confidence is plumbing new depths:

Italian consumer confidence unexpectedly declined this month to the lowest in more than 15 years as the country’s fourth recession since 2001 damped optimism.

The confidence index dropped to 84.6, the lowest since the series began in 1996, from 85.7 percent in December, the Italian statistics office Istat said in Rome today. Economists had predicted an increase to 86, according to the median of 12 forecasts in a Bloomberg News survey.

And here’s a chart to give the data some context:

The other news coming out of Italy is the growing scandal around Monte Paschi, Italy’s third-largest and the world’s oldest bank, which is fighting for its existence after recently reporting huge losses which were part of a financial cover-up involving hidden derivative contracts. The bank has requested nearly €4bn in state aid, which was approved by the Bank of Italy over the weekend, however there is a rumour that legal battles are brewing to block such action:

Monte dei Paschi di Siena  said on Sunday it was seeking a financial investor as the political storm over a derivatives scandal at the ailing bank intensified ahead of next month’s Italian election.

Italy’s third-biggest lender, which needs state loans to stay afloat, this week revealed opaque derivatives trades, conducted between 2006 and 2009, that could cost it some 720 million euros.

The scandal has turned the spotlight on Monte Paschi’s close political ties with the center left and on possible oversight failings by the Bank of Italy(BOI), then led by current European Central Bank chief Mario Draghi.

For those of you who aren’t across what has occurred,  Wikipedia provides a good wrap of recent history:

In 2009, the Santorini and Alessandria operations began creating huge losses. In order to hide them in the bank’s financial statements, the top management, including Giuseppe Mussari, the bank president, chose to enter into derivative contracts with Deutsche Bank and Nomura. Estimates of the losses accumulated by the Santorini and Alessandria operations in the period leading up to the derivative contracts range from € 500 to € 750 million.

The documentation concerning these operations were never communicated to the bank’s own auditors or the Banca d’Italia. The derivative contracts and related documentation were discovered and made ​​public by the new board of the bank in the end of November 2012. The documentation has been forwarded to the Banca d’Italia between December and mid January 2013.

The shareholders and the analysts have ascertained that the bank had not declared losses from derivatives. The January 22, 2013 the bank loses on the Stock Exchange (-5.6%) and the ex president Giuseppe Mussari of bank resigns from president of Associazione Bancaria Italiana. The next day, January 23, 2013 it was broke out the scandal hidden derivatives. The bank collapses on the Stock Exchange (-8.43%).  The January 24, 2013 the bank loses again on the Stock Exchange (-8%).

The January 25, 2013 is convened an extraordinary general meeting of the shareholders of the bank which resolved to grant the Board of Directors the power to increase the share capital by a maximum amount of € 4.5 billion to service the exercise of conversion rights of bank of the Monti Bonds.

Mps called for intervention of € 3.9 billion, including € 1.9 billion for the replacement of the previous Tremonti Bonds. The delegation of the extraordinary to the Board of Directors has also included the possibility of increasing the share capital of € 2 billion at the exclusive service of the payment of interest payable in shares. He voted for more than 98%. The bank earns on the Stock Exchange (+11.36%) after three sessions in three days with a total loss of more than 20% of the value.

On January 26, 2013, the Bank of Italy approved a bailout request from the bank for € 3.9 billion ($5.3 billion).

There is obviously much more to this story and with a national election due shortly in an environment of a weakening economy this has the potential to be a huge political story. Definitely something to watch evolve.

Other news out of Europe overnight was the latest report from the ECB on monetary developments in the Eurozone which continues to show that private sector de-leveraging is taking place, although the rate of decline appears to be slowing.

The annual growth rate of credit extended to general government decreased to 5.8% in December, from 8.4% in November, while the annual growth rate of credit extended to the private sector was less negative at -0.8% in December, from -1.6% in the previous month.

Among the components of credit to the private sector, the annual growth rate of loans stood at -0.7% in December, compared with -0.8% in the previous month (adjusted for loan sales and securitisation, the rate was less negative at -0.2%, from -0.5% in the previous month).

The annual growth rate of loans to households stood at 0.5% in December, compared with 0.4% in November (adjusted for loan sales and securitisation, the rate stood at 0.7%, compared with 0.8% in the previous month). The annual growth rate of lending for house purchase, the most important component of household loans, stood at 1.3% in December, compared with 1.2% in the previous month.

The annual growth rate of loans to non-financial corporations was more negative at -2.3% in December, from -1.9% in the previous month (adjusted for loan sales and securitisation, the rate was less negative at -1.3% in December, from -1.5% in the previous month). Finally, the annual growth rate of loans to non-monetary financial intermediaries (excluding insurance corporations and pension funds) increased to 0.7% in December, from -1.7% in the previous month

With the euro continuing to trend upwards on the back of the LTRO payback data , on-going tension around exactly what to do about Cyprus, another bank scandal erupting and continued evidence of economic strain across southern Europe, 2013 is evolving into yet another volatile year.

Full report from the ECB below.

ECB Monetary Policy developments Dec 2012

2 Responses to “ “The world’s oldest bank imperiled”

  1. Gunnamatta says:

    Well there is no real way around concluding that the operations with derivatives at Monte dei Paschi di Siena were known to both Mario Monti (former Goldman Sachs advisor and current Italian PM up for reelection) and Mario Draghi (then head of Bank of Italy and now ECB Chief)

    http://www.ft.com/intl/cms/s/0/dc1504ca-66e0-11e2-a83f-00144feab49a.html#axzz2JBNzMvHq

    http://www.ft.com/intl/cms/s/0/4f7f8fd0-664f-11e2-919b-00144feab49a.html#axzz2JBNzMvHq

    Should make life interesting in the Eurozone for a while yet…..

  2. GSM says:

    ” after recently reporting huge losses which were part of a financial cover-up involving hidden derivative contracts. ”

    The Italians are too honest it seems. That or the competition is gunning for them.

    The whole US Banking system is infected with this toxic problem, yet with a few keystrokes (FAS157) the values of these “assets” can be marked to whatever you want. Solvency!