Global Daily – Italy’s bank fund

In this publication: Italian government announces private bank fund to help problem banks raise capital but may need bigger scale to deal with enourmous non-performing loan problem. IMF lowers global growth forecasts and warns on risks calls for co-ordinated G20 policy response (probably in vain).

 

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Italy announces EUR 5bn private fund to help problem banks

The Italian government announced that a private fund would be set up, to be initially financed to a level of EUR 5 billion, to deal with the country’s problem banks. The fund will be financed by the larger Italian banks (UniCredit, Intesa Sanpaolo and UBI Banca) along with insurers and institutional investors. Quaestio Capital Management SGR will be the manager of the fund as the Italian government is restricted from management of the fund as that would be direct state participation. The fund will act as a buyer of last resort for banks that struggle to raise equity capital in the private markets and / or are unable to sell junior tranches of their securitized non-performing loans (NPLs). As a compliment to this measure, the government plans to pass tougher bankruptcy laws in the near term to help banks to recover NPLs more quickly.

 

Cash calls may be covered, but NPLs more challenging

A number of smaller Italian banks need to raise capital to meet regulatory requirements. The fund seems big enough to support initial issuance by these institutions even in the case that investor demand proves to be weak. However, the NPL issue may prove to be a tougher nut to crack, with the current size of the fund potentially proving insufficient. NPLs are large and still rising, while it is unclear how much investor interest there will be from investors for junior tranches. We will publishing a more detailed note on this issue shortly.

 

IMF downgrades global outlook and warns on risks

Meanwhile, the IMF downgraded its global economic forecasts once again, and warned of the risk of a return of financial turmoil, secular stagnation, as well as shocks from political risks, including the rise of populism in the US and eurozone and Brexit. It now sees global GDP growth at 3.2% in 2016 (ABN AMRO: 2.9%) revised down from 3.4% in its previous update. It lowered its projections for the US (2.4% from 2.6%), eurozone (1.5% from 1.7%), Japan (0.5% from 1%), the UK (1.9% from 2.2%), Brazil (-3.8% from -3.5%) and Russia (-1.8% from -1%), but upgraded its China growth forecast on resilient domestic demand (by 0.2 pp taking it in line with the authorities’ growth target of 6.5%). The IMF assessment of a weak global growth outlook is broadly in line with our own base case and risk outlook, though we are somewhat more pessimistic on economic growth, in particular in the US and Europe.

 

The IMF also made a plea for a global co-ordinated economic policy action at the G20 level. The IMF’s Chief Economist Maurice Obstefeld asserted that ‘by clearly recognizing the risks they jointly face and acting together to prepare for them, national policy makers can bolster confidence, support growth, and guard more effectively against the risk of a derailed recovery’. He may as well have been talking to a brick wall if recent G20 initiatives are anything to go by.