CRG Banca Carige SpA

By Giovanni Legorano 

ROME--Italy's populist government has offered to shore up an ailing bank with public money, in a sharp U-turn after attacking mainstream politicians for years for bailing out banks with taxpayers' money.

The country's embattled banking sector will provide a delicate test for the new government, as Italian lenders--whose bondholders include many ordinary savers--struggle to digest billions in bad loans accumulated during the financial crisis and shore up their fragile finances.

The governing coalition of the antiestablishment 5 Star Movement and the nativist League offered on Monday to prop up struggling Banca Carige SpA with financing guarantees or a direct injection of capital, two measures that the parties have denounced when previous governments used them to rescue or wind down lenders in Italy's crisis-scarred banking sector.

The case of Carige, a regional lender from Genoa hit by souring loans, a depressed local economy and years of mismanagement, is testing the ability of Italy's new government to break with the unpopular policies of the country's centrist establishment.

The League and 5 Star won power last year by promising a change of tack in major policy areas from the budget to immigration, but have been forced into a series of U-turns already by the fragility of Italy's economy as well as pressure from financial markets and European Union authorities. In December, the government watered down its plan to boost growth via a bigger budget deficit, in response to rising yields on government bonds that were pushing the economy toward recession.

League leader Matteo Salvini, the most powerful figure in the government, argued Tuesday that the government's offer of support for Carige is different from past bank bailouts because it would help small savers. "While (past leaders) ignored and forgot savers, we have intervened immediately to defend them, without doing favors to the banks, to foreigners, or to 'friends of friends,'" Mr. Salvini said in a statement.

Analysts noted that the same instruments and justifications were used by previous governments in several Italian bank bailouts since the financial crisis.

The long-running drama surrounding Carige escalated last week when its top management resigned because the controlling family shareholders refused to inject fresh capital to meet demands from regulators. The European Central Bank, which supervises the eurozone's larger banks, promptly appointed new administrators tasked with cleaning up the bank's loan book and finding a buyer. Trading in Carige's shares has been suspended.

Amid fears that Carige could collapse without fresh funding or capital, wiping out its shares and bonds and hitting many Italian savers, the government quickly got its checkbook out and offered help. Government officials also feared that Carige's failure could renew wider concerns about Italy's fragile banking sector and lead to a new selloff of government bonds.

"There has been a sudden change in the government position. Until last week, the government was saying it wouldn't use even one euro to save banks," said Angelo Baglioni, an economics professor at Cattolica University in Milan.

Under the eurozone's new and stricter rules on bank bailouts, governments are only supposed to inject taxpayer money into banks only after investors such as junior bondholders have taken a hit. The 5 Star Movement in particular has long denounced these rules for so-called "bail-ins" as an attack on small savers. The 5 Star and the League blasted Italy's previous centrist governments for applying the rules to investors in Banca Monte dei Paschi di Siena SpA, which was nationalized two years ago, and two Veneto-based banks that were liquidated in 2017.

If Rome ends up injecting fresh capital in Carige, EU authorities, whose approval is needed, will likely demand that losses be imposed on some investors, as in previous cases.

Facing a public backlash against the losses imposed on owners of bank bonds, who in Italy include many ordinary savers, previous governments set up reimbursement schemes, arguing that some individual investors were misled by banks into buying the bonds. Still, anger over bank bailouts helped undermine voter support for centrist governments and contributed to the rise of the 5 Star and League. At the end of June, mom-and-pop investors owned Italian bank bonds worth EUR76 billion, according to the Bank of Italy.

The two populist parties said the EU's new rules on bailouts would cause a "destabilization of credit with negative consequences for families," and pledged to challenge the rules to better protect the savings of ordinary Italians. The parties also argued for more-severe punishment of bankers found responsible for failures.

So far, however, the government is following the same playbook as its predecessors, said Mr. Baglioni.

On Tuesday, Carige said it plans to tap the government's offer of state guarantee to support the issuance of new bonds. It said it views the option of a direct recapitalization by the government as a last resort.

Write to Giovanni Legorano at giovanni.legorano@wsj.com

(END) Dow Jones Newswires

January 08, 2019 08:45 ET (13:45 GMT)

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