Italy planning euros 40 billion rescue fund to save its banking system

An Italian government task force is watching the markets hour by hour, pledging all steps necessary to ensure stability.

LONDON: Italy is preparing a euros 40bn (pounds 33bn) rescue of its financial system as bank shares collapse on the Milan bourse and the powerful aftershock of Brexit shakes European markets.

An Italian government task force is watching the markets hour by hour, pledging all steps necessary to ensure stability of the banks. "We are ready for anything," said premier Matteo Renzi.

"This is the moment of truth we have all been waiting for a long time. We just didn't know it would be Brexit that set the elephant loose," said a top Italian banker.

The share price of the country's banks crashed for a second trading day, with Intesa Sanpaolo off 12.5pc, Banka MPS 12pc, Mediobana 10.4pc and Unicredit 8pc. These lenders have lost a third of their value since Britain's referendum.

"When Britain sneezes, Italy catches a cold. It's the weakest link in the European chain," said Lorenzo Codogno, former director-general of Italy's treasury and now at LC Macro Advisors.

Italian officials are studying a direct state recapitalisation of the banks, to be funded by a special bond issue. They also want a moratorium of so-called "bail-in" rules and bondholder write-downs, but these steps are impossible under EU laws. Mr Renzi was to raise the subject urgently at a meeting with German Chancellor Angela Merkel and French president Francois Hollande at a summit in Berlin yesterday.

"There has to be a suspension of the bail-in rules and state aid rules at the highest political level in the EU, otherwise I don't see how this can work," said Mr Codogno. Unlike the eurozone debt crisis in 2011-12, there is no serious trouble yet in the sovereign debt markets. The ECB is effectively capping yields under quantitative easing.

Italy's banks are the Achilles' heel of the eurozone financial system. Non-performing loans have ratcheted up to 18pc of total balance sheets as a result the country's slide into depression after the Lehman crisis.

The new bail-in reform this year has brought matters to a head, catching EU authorities badly off guard once again. It was intended to protect taxpayers by ensuring that creditors suffer major losses first if a bank gets into trouble, but was badly designed and has led to a disastrous flight from bank shares. It is now almost impossible for Italian banks to raise capital.

They are caught in a pincer as the ECB simultaneously demands compliance with tougher capital adequacy buffers. Mr Renzi may be forced to take matters into his own hands and enact a unilateral sovereign rescue of the banking system in defiance of the EU, unless he wins concessions soon from Brussels.

Those who know him say he will not go down in flames for the sake of European ideological purity.

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