God takes care of those who take care of themselves – this proverb might be proved correct by Italian banks. The European Central Bank has tried the bail-in method with Cyprus and plans to continue this practice. As a reminder, the Cyprus banking crisis of March 2013 devastated the whole islands banking system, which led to deposit-taking and resulted in an erosion of trust in the banking system.
Currently, the oldest European bank Monte dei Paschi di Sienain Italy, has faced financial difficulties, which require a €5Bn recapitalisation. The ECB has already asked the Italian government not to wait for a rescue and instead find an investor that could bailout the bank. This approach can scare off private investors, experts say.
New rules suggest that European tax payers’ money can be used for bailout only if European bank debt holders take the burden of financial losses. In the case of Monte dei Paschi di Siena, this burden amounts to €2.1Bn – easy to understand why European banks and investors shuddered.
The overall debt of Italian banks currently amounts to €360Bn, which, combined with 11% unemployment, contributes to the minimisation of economic growth level over the last 15 years.