From Morgan Stanley:
Italian policymakers are facing a dilemma between the need to reinforce the capital of the banking system, and the need to protect retail savers. We review the options, but argue any government money involvement could put its support at risk in the upcoming referendum in October.
Pressure is building to restore confidence on Italian banks. We believe the EBA stress tests to be published July 29 will result in the authorities needing to address the recapitalization of Italian banks. Having spoken to policymakers, regulators, lawyers, we review the main options available. Our conclusion is that in the absence of new legislation being passed, the stress tests open up an avenue to inject public money, given it would avoid the 8% of liabilities being bailed in, although it would still require burden sharing of equity and sub debt.