The eurozone shouldn’t make unilateral moves to cap the amount of government bonds its banks can hold, Italy’s finance minister said, urging caution as the currency union adapts to new rules for its financial system.
The comments by Pier Carlo Padoan, made in an interview on the sidelines of the World Economic Forum here, highlight the stark disagreements that still exist between eurozone members over what the currency union needs to do to plug risks and boost still-sluggish growth. So-called exposure limits on government bonds?backed by fiscally hawkish countries such as Germany, the Netherlands and Finland?would deal a painful blow to Italy and its lenders, which own more than 70% of the country’s debt.
“Let’s be very careful about translating into practice rules that look nice on paper,” said Mr. Padoan, a former official at the International Monetary Fund and the Organization for Economic Cooperation and Development.
Jeroen Dijsselbloem, the Dutch finance minister, who presides over the talks between his eurozone counterparts, wants the currency union to agree on caps on banks’ government bond holdings this year?with the full limits coming into effect in 2024. That would ensure that lenders can survive a restructuring of their government’s debt, Mr. Dijsselbloem said.
But Mr. Padoan said that rather than mitigating risks in Europe’s financial system, caps on such bonds would raise funding costs for governments and could destabilize international markets as banks are forced into a rushed selloff.
“This would again be possibly a source of policy-induced instability,” he said, adding that any exposure limits would need to be agreed and implemented on a global level.
Under international capital rules, sovereign bonds are considered zero risk, allowing lenders to stock up on them without holding extra safety buffers. In 2014, the average eurozone bank owned bonds from its home country valued at 118% of total capital?much more than U.S. banks, whose average exposure to U.S. bonds was 14% of equity.
According to a 2014 analysis from Fitch Ratings, major eurozone banks would have to shed around ?1.1 trillion ($1.19 trillion) in government bonds if they were required to reduce their holdings to 25% of capital?in line with exposure limits on other assets. If exposure was capped at 50% of capital, the selloff could reach ?800 billion.
Rome has repeatedly clashed with Brussels and Berlin in recent months, on topics ranging from energy policy to the influx of refugees. On Tuesday, Mr. Padoan will meet with the European Union’s competition commissioner, Margrethe Vestager, to resolve a monthslong dispute over a mechanism to help Italian banks deal with billions of euros in bad loans that have clogged their balance sheets and are preventing them from writing new loans. The commission has so far rejected proposals from Italy for such as mechanism, arguing that they would have used taxpayers’ money to subsidize struggling lenders.
Mr. Padoan said the government was now looking at selling guarantees to private investors to encourage them to pay higher prices for portfolios of bad loans. “The guarantee changes the behavior,” he said.
Mr. Padoan declined to comment on the amount of guarantees the government might end up offering. Italian banks have some ?300 billion in bad loans on their books and have been much slower to write off nonperforming assets than their rivals in other countries.
Claims that the guarantees could amount to a backdoor bailout of the Italian banking system were misguided, Mr. Padoan said, pointing out that other countries such as Germany spent hundreds of billions of euros on saving their banks in the early years of the global financial crisis.
“This is not wasting taxpayers’ money,” he said.
Because new EU banking rules now require a bank’s investors?including senior bondholders and uninsured depositors?if a bank is on the verge of failing, Italy has to work out problems in its financial systems with much tighter restraints.
“We suddenly woke up in a world, which is different from the one our colleagues could exploit,” he said, adding that, “I can do much less.”