Giulio Cesare Croce wrote the tale of Bertoldo who, sentenced by King Alboin to be hanged, asked – as a last wish – to choose the tree he should have offered the neck to. The monarch, although fond of the peasant, was angry with his spiciness, but made him the grant. After long wanderings with his executioners, the shrewd villain chose a bush of strawberries. Alboin, amused by the ploy, pardoned him.

Even the Italian prime minister, Matteo Renzi, is sentenced to be hanged after having passively accepted the bail-in rules. Now he’s the target of German arrogance that does not allow subsidies for the management of non performing loans. Let us briefly examine which «tree» Renzi is forced to choose.

1. Default. It’s the recipe suggested in late December from Angela Merkel‘s adviser, Lars Feld. Italian banks can’t handle 350 billion euros of bad loans (of which 200 billion of gross NPLs). It would be better if the Italian State defaulted, repudiating its 2.2 trillion debt. By this way the Troika (EU Commission, ECB and IMF) would find a solution for the banks that could contemplate a State aid like in Greece.
2. Bail in. This is the proposal made by the Financial Times. No getting around it, the Italian banks won’t make it. You can not look too closely on losses by small investors and authorize a bail in within which the State may also grant some aid to the sector. In practice, the first bank to give up would be Monte dei Paschi followed by the others.
3. Homework. It is the solution proposed by Mario Draghi‘s friends. Matteo Renzi has done too much deficit with his last Budget law irritating his European partners. He would better getting back and doing his «homework» by cutting public spending and imposing new taxes on high net worth individuals if necessary. by doing so, Italy could regain trust, but probably would go back into recession. It would a high price to pay for bank subsidies.
4. The gift box. As the GACS (public guarantee on non-performing loans securitization) is useless, you can try to sweeten the pill. Bruegel, the Bruxelles-based think tank, suggest to mix up good and bad loans in the securitisation vehicles that Italian banks are going to set up in order to manage their non performing loans. The good loans’ cash flow would help in paying both the securitisations’ coupon and the State guarantee. This perspective is disadvantageous too. Banks should damage both their balance sheets by selling non performing loans at market price and their income statements because they should cut their net interest income to pay off their debt.

Matteo, just like Bertoldo, has also got a strawberry bush at his disposal. It is the solution proposed by Confindustria (the Italian business association) : «Let’s freeze the bail in rules and put money on the market». This means Italy should break up European Treaties and also a mull a Eurexit. Would it be a gamble? Does Italy have to commit suicide? Posterity will judge.

Wall & Street

Translation from Italian by Gian Maria De Francesco