Daily Times

Like the couples who flock to Florence and Venice to celebrate their romance, Italy too has experienced blind love.

For decades, Rome has been wholly committed to the project of European integration. A founding member of the EU, in the mid-1990s Italy was willing to pass a string of emergency measures to join the eurozone from its inception. Twenty years later, ecstasy has turned to agony. Battered by a deep recession and disappointed by a shallow recovery, Italian voters have turned to Eurosceptic parties such as the Five Star Movement to voice their discontent. While other eurozone countries face similar populist revolts, in Italy the resentment against Brussels has filtered through the elites, too. The reason is the handling of Italy’s banking crisis, which could soon turn the deepest of love affairs into the most bitter of divorces. Italy’s lenders are saddled with around €350bn in non-performing loans – the product of the economic crisis and a stream of poor lending decisions. So long as supervisory powers rested exclusively with Rome, Italian banks knew they could rely on the Bank of Italy’s more indulgent scrutiny. Forbearance provided a perverse form of stability, since banks did not have to face the true value of their losses. It also made the problem worse, however, since lenders were in no hurry to deal with their problematic loans. The creation of the banking union replaced this affection with tough love. The European Central Bank has taken a much more aggressive approach towards these piles of bad loans. Frankfurt has asked banks to stop pretending the money will come back one day and has demanded they find more capital to cover the losses they are bound to make. The most egregious example is Monte dei Paschi di Siena, the world’s oldest bank, which has been asked to find first Euro 5bn and now up to Euro 8.8bn in new capital to shore up its balance sheet.

The cultural clash between Brussels and Rome did not end there. The Bank of Italy had long prided itself for protecting investors in bank bonds from losing their money. This approach too is no longer viable under the new regime. The Bank Recovery and Resolution Directive demands that investors share at least some of the burden if a lender needs help from the state. The new bail-in regime has unveiled some grotesque episodes of mis-selling, which the regulator, Consob, failed to prevent. In theory, Rome has plenty to gain from embracing the new regime: banks with more equity and fewer bad loans on their books are better-equipped to lend to dynamic start-ups, which will drive economic growth in the future. Asking bondholders to contribute to a bank rescue can only be a good thing in a country where public debt has hit nearly 135 per cent of economic activity. Rome is not having any of this, however. The Bank of Italy has pushed back against the bail-in rules it is supposed to enforce, asking for their revision. The resentment against Brussels runs deep in the banking community in Milan, which accuses supervisors of heavy-handedness towards Italy and double standards vis-à-vis other eurozone lenders, for example in Germany. There is little doubt eurozone institutions have often failed to explain what the new regime is trying to achieve. The ECB should have been a lot clearer about why its capital requests for MPS nearly doubled after the government had to nationalise the bank. Equally, the European Commission must do a better job at outlining when a bank can be exempted from the bail-in rules because this would hinder financial stability. Ultimately, though, it is up to Italy to decide whether it is ready to stick to the rules it has signed up to. When couples exchange vows, they swear to be faithful, for better and for worse. As it grapples with the worst banking crisis in recent history, Rome should ask itself whether it is ready to continue to honour this promise.