Italian Bank Bail-In : The slow poison

The Italian government recently allowed bail-in* to rescue their regional banks - Banca Etruria has been into limelight. As per IMF, Italy's banking system has Low profitability & gross non-performing loans of € 330 billion. In addition to Banca Etruria, bail-ins were triggered at other regional banks - Cassa di Risparmio di Ferrara, Banca delle Marche and CariChieti. Two large Italian banks - Veneto Banca and Banca Popolare di Vicenza have also been told by regulators to raise their capital buffers. The rescue deal forced shareholders and junior bondholders to incur losses & will surely affect Junk bond market soon.

FTSE MIB index is depicting volatility, weakness & sharp declines. FTSE MIB Index is the primary benchmark index for the top Italian equity stocks. Italy FTSE MIB index decreased 87.07 points or 0.47% to 18554 on 26 Jan 2016 from 18641 in the previous trading session. Italy FTSE MIB index had lost 2202 points or 10.61% during last 12 months from 20756 levels in January 2015. The share price of Banca Monte dei Paschi di Siena SpA has fallen some 50% and since August 2015 (shemitah year) the Italian stock market has seen 25% collapse. Similar collapse happened worldwide too. The above graph also depicts BSE Sensex coinciding with FTSE MIB level close to April 2015. Since then a volatile down trend (trend line) is visible. You may try it for other stock exchanges and you will get the similar trend line for most of them.

A pensioner near Rome wrote a note criticizing the bail-in for Banca Etruria and then hung himself. The pensioner killed himself after his € 100,000 account at Banca Etruria was confiscated. The suicide drew worldwide attention because it symbolized the frustration and fury of Italian bank customers as they struggled to navigate their way through a failing banking system. Italian Prime Minister Matteo Renzi offered his condolences but defended the bail-in program, saying the € 3.6 billion rescue program had to happen to save jobs. But about 130,000 customers lost their investments.

On 01 Jan 2016, European Union had passed a law for official "bank bail-in" clause. The bail-in legislation has been put into law, across Europe. Cyprus 2013 episode is being re-enacted, where bank account holders had their funds seized to "save" the banks. It is very clear that the European Union knew what was coming, but it was also clear to anyone paying attention - What happened in Greece & Cyprus was just the beginning & would be replicated across EU. It is now happening in Italy & will eventually happen in other countries like Spain, Portugal, France and in countries all around the world, including the U.S.

This time its not the sudden death, 2008 style...Its the 'Slow Poison'.

A bailout differs from the term bail-in (coined in the 2010s) under which the bondholders and/or depositors of global systematically important financial institutions (G-SIFIs)* are forced to participate in the process, but taxpayers supposedly are not. Some governments have the power to participate in the insolvency process: for instance, the U.S. government intervened in the General Motors bailout of 2009-2013 - wikipedia

**A systemically important financial institution (SIFI) is a bank, insurance company, or other financial institution whose failure might trigger a financial crisis - wikipedia