Sunday, July 31, 2016

News Note: Keeping an eye on Italian Bank Rescue Plan

This is a news note related to an article appearing this evening about the rescue plan put in place Friday to stave off a potential bankruptcy for a major Italian bank. This news is important because as I understand it this Italian bank is a significant counterparty to Deutsche Bank. Obviously, the last thing DB needs is for a major counterparty to fail and be unable to meet obligations. I believe this is likely why such a massive and apparently risky rescue plan was put together. 

As we have pointed out here many times, because of the interconnected nature of the banking system, we must always keep an eye on things like this if we know about them. Below are some excerpts from this news article that explains the rescue plan and also notes the potential problems with it.


Italian bank's rescue plan faces hurdles

"With the ink barely dry on its bailout plan, Italian bank Monte dei Paschi di Siena faces a Herculean task convincing investors to back a third recapitalisation in as many years and avert a banking crisis that would send shockwaves across Europe.
To stave off the risk of being wound down, the world's oldest bank has hastily unveiled the private sector-backed rescue blueprint late on Friday. It came just hours before the lender emerged as the worst performer in European stress tests that showed its capital would be entirely wiped out in a severe economic downturn."
. . . . 
"Global investment banks have made a preliminary agreement to underwrite the rights issue by Italy's third biggest bank.
But this is subject to conditions, including that the second prong of the bank's plan is successful: the sale of 9.2 billion euros of bad loans via a mammoth securitisation, whose sheer size is unprecedented in Italy.
As the bank's shares - which have lost nearly 80 per cent of their value this year - brace for Monday's market reaction to the bailout scheme, senior bankers and fund managers are already questioning the chances of the plan's success.
"Both legs of the plan are potentially fragile," said Filippo Alloatti, credit analyst at asset manager Hermes Investments.
"It will be difficult to complete such a big capital increase given their track record with past cash calls, and the securitisation is a monster operation, a puzzle full of moving pieces that need to fall into place. The execution risk is significant."

Added notes: Here is an old Bloomberg article that illustrates this bank and DB have a history with derivatives.

The monthly Crisis Watch Update article is now published here. It has some updated links and quotes from a wide variety of sources I read to try and stay informed. 

On 8-4-16 will publish an article featuring Central Bank expert Robert Pringle who says current monetary policies are immoral and explains why he feels that way.

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