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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Markets relieved after Italy agrees €17bn bank rescue – as it happened

A Veneto Banca bank branch in Venice, Italy.
A Veneto Banca bank branch in Venice, Italy. Photograph: Alessandro Bianchi/Reuters

Nils Pratley: Italian deal isn't progress

And finally, here’s our financial editor Nils Pratley on the Italian banking deal, and its worrying implications for the long-term health of the Eurozone banking sector....

One cannot get around the fact that the spirit of the relevant EU banking directive has been ignored. The rules apply, except when they don’t, it seems. That has two important consequences. First, as Capital Economics argues, the “doom loop” between Italian banks and the Italian government remains a worry. If taxpayers can be on the hook at two regional banks, they may also be exposed if and when the banks more important and the sums significantly greater.

Second, as the thinktank also points out, the cause of banking and fiscal integration in the eurozone has just suffered a serious jolt. In the next round of collective risk-sharing, eurozone states are supposed to guarantee deposits in each others’ banks. It is now hard to imagine Germany rushing to join such a scheme.

So forget the market’s initial cheery response to this Italian bank job: a short-term problem has been fixed only by raising major long-term uncertainties. That does not sound like progress.

And that’s probably all for today; thanks for reading and commenting... GW

After a strong start to the day, the stock market rally is fizzling out in late trading.

The FTSE 100 is now up only 0.3%, or 25 points, having gained nearly 60 points this morning.

Chris Beauchamp of IG says the weak American manufacturing orders figures released a couple of hours ago dented the mood in the City.

An afternoon wobble has dented what had been a very positive day for stock markets. Another apparently order bank rescue for the eurozone, this time in Italy, plus a robust German IFO reading, had put markets on the front foot in the early part of the session. Even the UK government appeared to get its act together, with a deal between the Conservatives and the DUP putting the Tories across the threshold for a majority. But once again the summer malaise appears to be getting the better of equity markets, with gains being surrendered as London heads towards the close, with a disappointing US durable goods figure not helping matters.

Unsurprisingly, financial names are in high demand in London following the Italian banking news, which is helping to keep the FTSE 100 in positive territory. But it is clear that for now investors are none too keen on pushing global markets higher. It could be a long summer.

Silvia Merler, fellow at Bruegel, has published a really good analysis of last night’s Italian bank deal.

Here’s her conclusion:

Overall, this episode confirms a pattern in the management of Italian banking sector problems over the past years. Authorities try to kick the can down the road and often let political considerations outweigh economic issues.

We have seen this in the delay of MPS’ recapitalisation until after the constitutional referendum, in the creation of Atlas [Italy’s bank bailout fund], and in the never-ending effort to shield retail junior bondholders to whom the sale of those product should have instead been better prevented.

And we see it again here, in the use of generous liquidation aid. Some in Italy will see this last turn as a happy ending. Others will see it for what it actually is: a political choice.

In Brussels, this episode will perhaps finally demonstrate that harmonising bank insolvency law is an indispensable complement to BRRD, as argued strongly by others before. As long as this is not done, the door remains open for the use of national insolvency frameworks to escape from resolution.

US durable goods orders slide

The latest US economic data is out....and it’s weaker than expected.

Orders for durable goods shrank by 1.1% in May. That’s nearly twice as large a drop as expected, and suggests US companies were more cautious about buying new machinery and electrical equipment last month.

It’s the second monthly fall in a row, and the biggest drop in six months.

This has knocked the US dollar, and also driven down the yield (or interest rate) on US government debt. That shows that Wall Street is dialling back its expectations for US interest rate rises.

Andrew Hunter of Capital Economics says the data shows businesses cut back on capital investment this quarter:

May’s durable goods data suggest that, after rising at a 7.2% annualised pace in the first quarter, business equipment investment has expanded at a much more modest pace in the second, which would fit with the slightly weaker tone of some of the surveys.

Nonetheless, with consumer spending growth on course for a big acceleration, overall GDP growth is still likely to have rebounded quite strongly.

Back in Greece, efforts to resolve the row between striking municipal rubbish workers and the government have collapsed.

Unionists are now vowing to continue their walkout until Thursday amid warnings of a public health crisis as temperatures surpass edge towards 40 degrees Celsius, and rubbish continued to pile up.

From Athens, Helena Smith reports:

After abruptly ending talks with interior minister Panos Skourletis, the head of the municipal worker’s union, Nikos Trakas, demanded that prime minister Alexis Tsipras intervene.

Skourletis, he said, had thrown out the union’s counter-proposal – following the government’s olive branch offer of extending short-term contracts and permanent job status to around 2,500 workers – after five minutes. “We will continue the fight and on Thursday we will demand to see the prime minister of the country because the interior minister is incompetent,” he said.

Meanwhile Thessaloniki’s mayor, Yannis Boutaris, has announced that he will outsource rubbish collection to private contractors as piles of garbage gather almost a week after the strike began. Temperatures are set to hit 43 degrees Celsius on Wedsnesday.

A pile of garbage outside a Pet shop, in Piraeus, near Athens, today.
A pile of garbage outside a Pet shop, in Piraeus, near Athens, today. Photograph: Petros Giannakouris/AP

Updated

Gold hits five-week low

Gold has hit a five week low this morning, as investors move money into riskier assets like shares.

The price of an ounce of gold bullion fell 1.2% at $1,240, its lowest level since 17 May.

Craig Erlam, senior market analyst at OANDA, attributes the moves to relief over the Italian banking deal, and the Conservative-DUP pact signed this morning.

The one notable piece of news over the weekend came from Italy where an agreement was reached that will avoid winding down two Italian banks, the good assets of which will be transferred to Intesa Sanpaolo. The resolution seems to have appeased both the European Commission and the Italian government, both of which have been at loggerheads as to how to deal with the failing banks, as well as investors with financials across the board being boosted by the announcement.

Reports this morning of an agreement between the Conservatives and Northern Ireland’s DUP have seen the pound pop higher, albeit only marginally given that the deal has been widely anticipated and doesn’t offer the kind of stability that a majority or even full coalition would. The deal will see Northern Ireland receive an extra £1 billion over the next two years in exchange for the DUPs support for May’s minority government. With the deal now agreed, the next question is whether May will remain in charge throughout that period.

The improved sentiment in the market is weighing on safe haven assets, particularly Gold which is down more than 1% on the day. Gold recovered back towards $1,260 towards the end of last week but has been sold heavily this morning, hitting its lowest level since the middle of May at one point. A sustained break below $1,240 could trigger a move back towards $1,220, which has been a very notable level on numerous occasions this year.

As this chart shows, gold took a tumble early this morning, sparking chatter in the City that a traders could have made a fat-finger error....

The gold price today
The gold price today Photograph: Thomson Reuters

The pound has nudged a one-week high, after UK prime minister Theresa May finally secured an agreement with Northern Ireland’s DUP party.

Sterling gained almost half a cent at one stage to $1.2759, the highest since 19 June, as the City welcomed a rare piece of political certainty.

The deal isn’t cheap, though; the DUP have secured an extra £1bn in spending on Northern Ireland over the next two years, in return for promising to support the Conservatives in confidence and budget votes.

This has already caused a stir, with critics wondering which ‘magic money tree’ is providing the cash and other UK regions suggesting they should get more funds too.

Over in Milan, branches of Veneto Banca and Banca Popolare di Vicenza have opened as usual today.

And there are no signs of panic. That will please Italy’s finance minister, Pier Carlo Padoan, who pledged last night that it would be business as normal, following the sale of these ‘good’ assets to Intesa SaoPaolo.

People line up at a cash machine of a Veneto Banca branch in Milan, Italy, Monday, June 26, 2017.
People line up at a cash machine of a Veneto Banca branch in Milan, Italy, Monday, June 26, 2017. Photograph: Luca Bruno/AP
People walk past by a Veneto Banca branch in Milan, Italy, Monday, June 26, 2017
People walk past by a Veneto Banca branch in Milan. Photograph: Luca Bruno/AP
A couple leaves a Banca Popolare di Vicenza branch in Mila.
A couple leaves a Banca Popolare di Vicenza branch in Milan. Photograph: Luca Bruno/AP

Let’s get back to Italy...where the Bank of Italy has revealed that the rescue of the world’s oldest bank, Monte dei Paschi di Siena, is complete.

Here’s the Reuters’ newsflash:

Six months ago, the Italian government decided to bail out Monti dei Paschi, after efforts to raise capital from private investors failed (as with the Veneto banks).

Since then, officials have been negotiating with EU authorities over how to handle the rescue. A draft plan was drawn up earlier this month, that will see some bond-holders “bailed in”, taking a financial hit.

Rome is also expected to inject state funds into MPS, by tapping into a €20bn fund created last year (which is also being used to finance last night’s deal for Veneto Banca and Banca Popolare di Vicenza)

One last line from the TUC conference on insecure work, from Ioana Cerasella Chis of the University of Birmingham:

Updated

Miatta Fahnbulleh, research director at the IPPR, argues that Britain’s economy would be more productive if workers benefitted from better protections.

Rather than simply worrying about job creation, Fahnbulleh says organisations should consult with staff to redesign and improve the workplace.

Stefan Baskerville of the New Economics Foundation is also at the TUC conference.

He argues that the increased digitalisation of the labour market is creating more insecurity for workers, and giving employers more power to control workers, including through algorithms that assess performance.

Here’s a thought....would company bosses care more about pay and conditions if their tax rate depended on it?

The Citizens Advice service share the TUC’s concerns over the high cost of taking an employer to an unfair dismissals tribunal:

Union chief: Workers need proper rights, not 'flexibility'

Ouch!

Sally Hunt, general secretary of the University and College Union has slapped down Matthew Taylor’s argument that workers enjoy the flexibility of today’s labour market.

Hunt points out that the boom in self-employment and zero-hours contracts is a recipe for exploitation.

Updated

Despite his comments about protecting ‘flexible’ work, Matthew Taylor does concede that many workers in the Gig economy are unable to save for their pensions or pay for sickness insurance.

Next up at the TUC conference is Matthew Taylor, chief executive of the Royal Society, who is conducting a government review into modern employment practices.

After a tweet warning his audience not to expect too much (!), Taylor reveals that his inquiry should be published in a couple of weeks:

However...Taylor then argues that many workers appreciate the “flexibility” in today’s labour market; and that the priority has to be to get people into work.

Updated

TUC conference on flexible work begins

Back in London, the TUC’s conference on Britain’s insecure jobs market is underway.

The session begins with a warning about the growth in contracts that don’t provide any fixed hours work:

TUC general secretary Frances O’Grady is now warning that this boom in insecure work is actually hurting the UK economy:

Updated

We now have confirmation that the Italian bank rescue deal is jolly good news for investors who own debt issued by the two Veneto-based lenders.

The value of bonds issued by both banks has soared this morning, after it became clear that bondholders would be spared losses (much to the anger of German MEP Markus Ferber).

The FT has the details:

Veneto Banca and Banca Popolare di Vicenza senior bond prices rocketed up more than 15 points on Monday, after the Italian government shielded the notes from losses in its wind-down of the two lenders.

The senior bonds had been trading at steep discounts to face value, reflecting investors’ fears that they could be “bailed-in” – a process whereby losses are imposed on private creditors to lessen the cost to the taxpayer. But over the weekend the EU commission signed off a scheme that will see Intesa Sanpaolo take on the good assets of the two Venetian banks, while also fully protecting senior bondholders.

Vicenza’s €750m 2020 senior note was trading at around 85 cents on the euro on Friday, according to Tradeweb prices, but soared up to 102 cents on Monday morning. Veneto’s €500m 2019 senior bond surged from 88 cents to 103 cents over the same period.

I’m sure that Italian taxpayers are absolutely delighted for these bondholders...

Markets boosted by Italian bank deal and German confidence

The Italian bank rescue/wind-up has helped to spark a relief rally across Europe’s stock markets.

Shares are up in London, Milan, Madrid, Paris and Frankfurt, as investors welcome the news that two of Italy’s fragile lenders have been dealt with.

The Italian FTSE MIB index is the top performer, up almost 1.5% this morning. Inteso Sanpaolo is still up almost 4%, with other banks also gaining ground.

European stock markets at 10.15am today
European stock markets at 10.15am today Photograph: Thomson Reuters

David Madden, market analyst at CMC Markets, explains:

European equity markets are higher on the day as two Italian banks were rescued over the weekend. The deal will result in Vento Banca and Banca Popolare di Vicenza being wound down, and the good assets of both banks will be sold to Italy’s largest retail bank, Intesa Sanpaolo, and the Italian government will should the burden of both banks bad assets.

The bailout could cost the Italian tax payer up to €17 billion. There are still questions still hanging over the Italian banking sector, but for now investors are content with the Continent’s financial health.

The jump in German business confidence, to a record high, has also cheered investors.

Joshua Mahony of IG says the IFO report has bolstered confidence in the eurozone economy.

The German economy appears to be in rude health, if today’s record Ifo business climate figure is anything to go by. According to Ifo, German businesses are ‘jubilant’, and it is clear that investors feel the same way, with the record high reading sparking a sharp move higher for the DAX, while gold immediately shed 1.4%.

This is just the latest in a long line of encouraging economic indicators, with the eurozone seemingly emerging from years of decline at the very moment that the UK decided to leave the EU.

German business optimism hits new heights

Newsflash: Morale among Germany’s business leaders has hit a record high.

The German business confidence index, produced by the IFO economic institute, has jumped to 115.1 this month, beating expectations.

IFO found that German businesses are optimistic about the economic situation, and hoping to export even more to the rest of the world despite the uncertainty around Brexit.

Meanwhile in Greece, strikes continue

A pile of garbage in Piraeus, near Athens, this morning. Municipality workers have been on strike for almost a week, hindering trash collection across the country.
A pile of garbage in Piraeus, near Athens, this morning. Municipality workers have been on strike for almost a week, hindering trash collection across the country. Photograph: Petros Giannakouris/AP

Breaking away from Italy, municipal refuge workers in Greece have upped the ante in their ongoing clash with the Athens govenment that has left the streets covered in uncollected trash.

The workers are extending their strike action, and continuing to demand that they shold receive permanent jobs when their existing short-term contracts expire.

Helena Smith reports from Athens:

An air of early summer crisis has symbolically imbued the ever-greater mounds of rubbish piling up around Greece.

In a bid to break the impasse the interior minister Panos Skourletis announced, after a crisis meeting late Friday, that the leftist-led government would rush an amendment through parliament today effectively prolonging short-term contracts on the brink of expiry and opening the way for permanent jobs later this year.

But....the olive branch, which would have seen around 2,500 workers given permanent status, was roundly rejected by unionists who are expected to make their own proposal later today. It is far from certain how international creditors will react to prime minister Alexis Tsipras openly defying labour reforms recently legislated in exchange for bailout funds to avert default.

Many fear that with temperatures in their mid 30’s, and Greece heading towards a heat wave, the standoff could create a public health crisis if the rubbish piles aren’t cleared imminently. Short of being resolved the municipal workers have vowed to continue striking until Thursday.

Updated

Last night, Bloomberg reporter Ferdinando Giugliano rattled out some interesting points about the Italian bank deal:

German MEP blasts Italian bank rescue

German conservative MEP Markus Ferber (EPP) is extremely unhappy that Italian taxpayers are paying the cost of winding down the two Veneto lenders.

In a strongly worded statement, Ferber argues that the central principle of European banking regulation – that bondholders shoulder losses if a bank fails – has been undermined.

He says:

“With this decision, the European Commission accompanies the Banking Union to its deathbed. The promise that the tax payer will not stand in to rescue failing banks anymore is broken for good.

I am very disappointed that the commission has approved this course of action. By doing so the Commission has massively undermined the credibility of the Banking Union. If the common set of rules governing banking resolution is so blatantly ignored, there is no point in negotiating any further on a common deposit insurance scheme.

The precondition for a working Banking Union is a common understanding of its rules. If such a basic common understanding is lacking, there is no point in further deepening the Banking Union and mutualising risk.”

Top German economist Isabel Schnabel is also unhappy that senior creditors are being spared any losses:

This chart, from the EC’s competition offices, shows how Italy managed to wind down Veneto Banca and Banca Popolare di Vicenza under its national laws, rather than EU rules.

Michael Hewson of CMC Markets isn’t impressed by this deal.

He points out that Spain recently managed to engineer the rescue of its own failing bank, Banco Popular, without spending a penny of taxpayers’ money.

So much for the so called new single European rule book and the much vaunted European Banking Union. It appears that there is one rule for Spanish banks, and the recent rescue of Popular Bank, and another for Italian banks.

Let’s hope the Italian government has deep pockets given that this particular bailout is a fraction of the non-performing loans in the Italian banking system, of which it is estimated there are about €300bn.

Shares in Intesa Sanpaolo have jumped by over 3% at the start of trading in Milan.

Traders clearly think Intesa is getting a good deal, and no wonder. It’s just picked up more customers, plus €5bn from the Italian state to ensure that its capital ratios aren’t affected by the deal.

Other financial shares are also rallying, sending the Italian banks index up by 2.5%.

Reuters: Job losses loom as 600 branches may close

The bad news is that thousands of jobs are likely to be lost across Banca Popolare di Vicenza and Veneto Banca, now they are part of larger rival Intesa.

Reuters has the details:

Intesa Sanpaolo said on Monday its planned acquisition of the good assets of Banca Popolare di Vicenza and Veneto Banca could lead to the closure of around 600 branches and the departure, on a voluntary basis, of around 3,900 staff.

Italy began winding up the two failed regional banks on Sunday in a deal that could cost the state up to 17 billion euros ($19 billion) and will leave the lenders’ good assets in the hands of Intesa, the nation’s biggest retail bank.

Rome spent the weekend drafting an emergency decree to liquidate the two banks, which collapsed after years of mismanagement and poor lending. The decree will have to be voted into law by parliament within 60 days.

Updated

Why Italy is using taxpayers funds to rescue its banks

Overnight, the European Commission approved the €17bn Veneto bank rescue - even though it appears to breach the principle that taxpayers shouldn’t rescue failing lenders.

Margrethe Vestager, EU competition commissioner, said:

“Italy considers that state aid is necessary to avoid an economic disturbance in the Veneto region.”

Many Italian bank bonds are owned by small retail investors. The Italian government has concluded that it it better to use state funds for this bailout, rather than inflict losses on ordinary families in the Veneto region.

Robin Bew of the Economist Intelligence Unit says Rome has performed some impressive “legal gymnastics” to get the deal through:

But could the deal undermine the whole principle of European banking union, and the idea that bondholders stump up when things go wrong?

The Financial Times says the deal could be a special case....

The drawn-out handling of the Veneto crisis has wider implications for Europe’s banking union, which aims to integrate oversight of eurozone lenders partly based on the assumption that private creditors would cover bank failure costs, rather than taxpayers.

The Italian state intervention to protect senior bondholders and big depositors runs counter to that principle but has been allowed because the banks’ liquidation means there are no competition issues.

The agenda: Italy's €17bn banking rescue

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Today we’ll be watching Italy, after the Rome government scrambled to wind down two regional lenders in an attempt to prevent a bank run.

Last night, the Italian government agreed a deal in which the good assets of Veneto Banca and Banca Popolare di Vicenza will be acquired by Italy’s biggest retail bank, Intesa Sanpaolo.

Rome acted after the European Central Bank declared that the two banks were “failing or likely to fail”, rattling confidence in the Italian banking sector.

But the deal comes with a cost - Rome is handing Intesa €5bn to make the deal fly, and also providing €12bn of state guarantees to cover potential losses on the toxic assets and bad debts left behind.

The size of the rescue package has stunned some analysts, especially as it doesn’t obey the principle that bondholders, not taxpayers, are meant to take the hit when a bank fails.

Economy Minister Pier Carlo Padoan defended the deal last night, telling reporters that:

“Those who criticise us should say what a better alternative would have been. I can’t see it.”

The deal means that branches should open as usual this morning. And with Intesa now in control, the Italian government will be hoping to avoid a bank run today.

Here’s the story:

Also coming up today:

The TUC are holding a conference into insecure work in London today, in an attempt to improve the conditions and pay of some of Britain’s most downtrodden workers.

My colleague Katie Allen has interviewed TUC general secretary Frances O’Grady about this issue, and heard that the UK labour market must be improved.

O’Grady told us:

“There are people across the spectrum who are pretty outraged at what’s going on in 21st-century Britain. But nothing’s happened. We had the prime minister on the steps of Downing Street, we’ve had promise after promise, and we’ve had no action. So I think patience is wearing thin and I think it’s important that politicians do listen – but more importantly that they act. And there is no reason for delay. How much more evidence do people need?”

The TUC wants zero-hours contracts banned and for everyone on regular hours to have a right to a written contract guaranteeing their normal working hours. It wants an end to bogus self-employment and believes the law should change to give people a default right to qualify for all employment rights, unless the employer can demonstrate they are genuinely self-employed.

Here’s the full story:

We’ll also be watching out for a new survey of German business confidence this morning, and US manufacturing orders numbers after lunchtime.

The agenda:

  • All day: TUC conference on insecure work
  • 9am BST: German IFO business climate index
  • 1.30pm BST: US durable goods orders

Updated

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