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20th Sep 2020

Court ruling puts Renzi bank plan in doubt

  • Renzi (l) is in talks with the EU Commission on his bank bailout scheme (Photo: Italian PM office)

An EU court ruling on bank bailouts has raised the likelihood of a political embarrassment for Italian leader Matteo Renzi, with the PM’s future and Italy’s eurozone membership on the line in an October referendum.

The European Court of Justice (ECJ) said on Tuesday (19 July) that Slovenia acted within EU law when it imposed a haircut of some €600 million on private-sector creditors as part of its bank rescue package in 2013.

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  • Sign of the times: Five Star's Virginia Raggi won a recent vote to become the mayor of Rome by a whopping 67 percent (Photo: Movimento5stelle)

It also ruled that the European Commission was within its rights when it published guidelines in July of the same year that said member states should make private creditors pay for part of bank rescues instead of placing the entire burden on taxpayers via state aid.

“Burden-sharing by shareholders and subordinated creditors as a prerequisite for the authorisation, by the commission, of state aid to a bank with a shortfall is not contrary to EU law,” the ECJ said.

The Italian government is currently in talks with the EU on how to protect Italian banks from a pile of bad debts worth €360 billion.

Renzi had wanted to fully protect private creditors from taking a hit. But the commission, as well as German chancellor Angela Merkel, has so far said his state-aid rescue would probably be illegal because it would distort competition.

The ECJ ruling did give the commission the option to grant special exemptions.

It said “the commission may authorise such proposed aid in exceptional circumstances” with “the objective of preventing a systemic risk and ensuring the stability of the [member state’s] financial system”.

But a commission spokeswoman the same day indicated that Brussels was not happy to give way despite the potential political fallout.

“The court has specifically confirmed that the commission is justified in introducing burden-sharing principles as a key condition to approve the [state] aid,” she told press in the EU capital.

“Their application has in past cases saved European taxpayers a significant amount of money.”

In a sign of how the markets see the situation unfolding, shares in Italy’s most indebted bank, the Banca Monte dei Paschi di Siena, fell a further 6 percent on the back of the court ruling.

October referendum

The developments come a few months ahead of a referendum in Italy that risks questioning the country’s future eurozone membership and, with that, the stability of the EU project as a whole.

On paper, the October vote, on constitutional reform of Italy’s Senate, has nothing to do with banks or the EU.

But in the post-Brexit climate, and given Italy’s broader problems - it has a staggering debt-to-GDP ratio and mass unemployment - the referendum is expected to turn into a vote of confidence on Renzi and on the EU’s handling of the economic crisis.

Renzi himself has promised to step down if he loses in a move likely to prompt snap elections before the original due date in early 2018.

That chain of events, if it transpires, could sweep the eurosceptic Five Star Movement party into power in the eurozone’s third largest economy.

According to an Ipsos poll out this week, Five Star is already Italy’s most popular party, with 30.6 percent of support compared to 29.8 percent for Renzi’s Democratic Party (PD). The figures represent a surge in popularity, after the PD led Five Star by 6 percent in polls in January.

Five Star does not want Italy to leave the EU and parties that do, such as the far-right Northern League, have dropped in polls amid the post-Brexit turbulence in the UK.

But in the European Parliament, Five Star is part of the Europe of Freedom and Direct Democracy group, with Nigel Farage's UK Independence Party and Alternative for Germany.

And party leaders, such as the 30-year old Luigi Di Maio, the deputy speaker of the Italian parliament, have blamed the rigours of single currency membership for Italy’s woes and believe the country would be better off it was free to make its own fiscal decisions.

Bigger than Brexit?

Speaking to The Guardian, a British daily, on Tuesday, Di Maio said the EU “is not guilty of everything it has been blamed for”.

But he said that EU-imposed austerity and elitism meant that it “has decided to abdicate from its role of protecting the internal market and protecting its citizens”.

He said that if Five Star got into power, it would call “a referendum which asks citizens if they want to remain in the euro, if they want to go in another direction, renegotiate the euro, or return to the lira”.

If the prospect of Italian voters saying that they want to quit the eurozone appears remote, it is considered a realistic threat in the financial sector.

“The key way in which Brexit becomes a global and systemic shock, the transmission mechanism, is Europe - and it’s not trade with Europe, it’s financial linkages and political goings-on in Europe,” Paul Diggle, an economist at Aberdeen Asset Management, a Scottish firm, said in a briefing earlier this week, the Bloomberg news agency reported.

“There are a whole series of potential [post-Brexit] flashpoints. The most immediate one is clearly the referendum in Italy”, Diggle said.

Tina Fordham, an analyst at the US-based Citibank, said in a memo published on 3 July that Italy’s October vote posed a bigger risk to EU stability than even the UK’s decision to leave the Union.

The upcoming Italian referendum “is probably the single biggest risk on the European political landscape this year” Fordham’s memo said.

A €45bn headache for Italy

Italian banks stricken by massive amounts of bad loans and falling shares are becoming a financial and political problem for PM Matteo Renzi and for the EU.

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