German Chancellor Angela Merkel may be willing to help shield Prime Minister Matteo Renzi from political damage if he bails out Italian banks.
With the European Union buffeted by Brexit, a state of emergency in Turkey and populists advancing across the continent, Merkel wants to avoid any further instability that could arise from Renzi’s attempts to tackle Italy’s banking crisis, according to three German government officials who asked not to be named discussing strategy.
Renzi is trying to navigate European Union rules stating that creditors must take a hit when banks are rescued, while also seeking to protect small investors from the fallout — a potential vote killer that could cost him his job in a referendum due in the fall.
Merkel, who repeatedly stressed after the financial crisis that taxpayers should never bail out banks, is aware of Renzi’s dilemma and is prepared to support a flexible reading of the EU rules to help him, according to the officials. That could mean accepting some form of Italian government compensation for retail investors to limit the political fallout, they said.
“This is the price Mrs. Merkel has to pay,” Carsten Brzeski, chief economist of ING-Diba AG in Frankfurt, said by phone. “They can’t afford to see Renzi fall in the coming months and face the danger of a populist government in Italy. They’ll be ready to go a long way to prevent such a scenario.”
Trailing in Polls
The Italian leader is struggling to maintain the momentum of his early months in power in 2014 as the economy drags and voters wait for him to deliver on his promises of dramatic reform. His ambitions to remake Italy face a crucial test in the fall with a referendum expected on constitutional reform to end the country’s long history of revolving-door governments by reining in the Senate’s power to topple prime ministers.
Renzi has promised to quit if he loses that vote, and has seen his Democratic Party’s popularity sag in recent opinion polls. A senior Italian official speaking on condition of anonymity last week said the reform was so central to the prime minister’s plans that he’d have no option but to step down if it failed.
An opinion poll by the IPR Marketing institute this month showed 52 percent of respondents opposed Renzi’s proposal and 48 percent in favor.
Before that vote, Renzi has to shore up a banking system that is struggling with some 360 billion euros ($397 billion) of past-due loans and holding back economic growth. Italian lenders have about 59 billion euros of subordinated debt outstanding which could be in line for losses. About half of that is owned by retail investors.
When junior creditors were handed losses in a previous bailout in 2015, the move sparked protests by savers, a nationwide selloff of bank debt and one suicide.
BlackRock Inc. Vice Chairman Philipp Hildebrand has argued that the European banking industry requires a broader clean up like the 2008 Troubled Asset Relief Program, or TARP, in the U.S. Indeed, Renzi himself said this month that other lenders with exposure to derivatives pose a bigger threat to the European financial system than non-performing loans in Italy.
Still, if the Italian premier makes another misstep, the anti-establishment Five-Star Movement is ready to capitalize. The group has been accusing the prime minister of putting bankers’ interests before ordinary Italians’, has overtaken Renzi’s Democratic Party in some recent polls, and won control of Rome and Turin in last month’s local elections.
If Renzi were to insist on resigning, President Sergio Mattarella would have to ask someone else to step in — as the fourth unelected premier in a row — or call early elections, opening the door to Five-Star. To avoid that scenario, officials in Berlin are expecting a plan that would see retail investors that suffer losses on junior bank debt receive compensation from the government for being “missold” those investments.
Merkel hasn’t always seen eye to eye with Renzi. The Italian leader has complained about the chancellor meeting French President Francois Hollande ahead of EU summits to agree common positions, and they’ve had long-running tussles over Italy’s budget and Europe’s response to the refugee crisis. But Merkel recognizes that he’s still a better partner than Five-Star, which wants its own referendums on pulling Italy out of the euro.
“As far as Italy is concerned, there are intensive talks with the Italian government and the European Commission,” Merkel said on July 12. “I’m firmly convinced that these questions that will have to be decided will be well resolved — and I don’t see any crisis developments in general.”