Italy bank rescues spark bail-in debate as anger at Renzi grows

In 2013, Sergio Picinotti, a 63-year-old unemployed man living with his elderly mother, invested much of their nest egg of €40,000 in a bond issued by Banca Etruria, their local bank based in the medieval Tuscan city of Arezzo.

“They said ‘what are you doing keeping that in your checking account? Put it here, you’ll earn 4 per cent flat,” Mr Picinotti recalls. “A friend at the bank told me: ‘Trust me, it will take the third world war to shut down Banca Etruria’.”

Today, Mr Picinotti has lost all that money, but Banca Etruria never closed: in fact it was saved from collapse last month along with three other small banks in a dramatic rescue operation engineered by the centre-left Italian government led by Matteo Renzi.

The trouble is there was a price to pay: under the terms of the deal, several thousand subordinated bondholders such as Mr Picinotti were wiped out along with Banca Etruria shareholders, while holders of senior debt and depositors were spared.

“They stole it all, I’m living on the edge,” says Mr Picinotti, speaking from the CGIL trade union offices just outside the city walls. “My mom has Alzheimer’s so I sold her gold without telling her.”

Though their numbers are small, the plight of the distressed Banca Etruria retail investors has shaken Arezzo, a city known for its gold jewellery manufacturers. The bank has a 130-year history there and is one of the area’s largest employers.

But the reverberations of the bank rescue have also been felt far beyond Tuscany: as Europe prepares to institute new rules from next year which would force losses on bank creditors and big depositors, the saga of Banca Etruria serves as a cautionary tale to politicians and policymakers about the public backlash that could follow any future “bail-ins”.

On a national level, anger has been mounting towards Mr Renzi for his handling of the affair. It has created an unlikely hotbed of discontent with the 40-year-old prime minister and former mayor of nearby Florence in a region that is traditionally sympathetic to his own political party at a time when he is already battling declining polling numbers.

The main criticism of Mr Renzi — who is otherwise known for his sharp political instincts — is that he botched the rescue by giving in to EU rules on state aid which prevented the government from protecting all Banca Etruria investors.

“The government could have done things differently,” says Alessandro Ghinelli, the recently elected centre-right mayor of Arezzo, speaking from his frescoed office in a 14th century palazzo. “We get infraction proceedings on everything from the EU so we should have had the balls — excuse my language — to get another one.”

Italian officials have stridently defended the terms of the rescue, saying it was the best option available.

“The reality is there were EU rules and we had to respect them,” Mr Renzi told the FT this week, saying the European Commission sent a letter outlining what it could and could not do.

Had the rescue waited until January 2016, tougher EU rules would have kicked in that could have forced a “bail-in” of depositors with over €100,000 in order to save the hit to public finances.

“Without this [rescue] decree there would have been insane chaos,” Mr Renzi said in a separate radio interview last week. “A monument should be made to the government for this.”.

Meanwhile, the government has set up a fund worth about €100m to help compensate the hardest hit victims of the rescue and damp some of the increasingly vocal protests.

The Banca Etruria case has also revived worries about the health of the Italian banking sector, which remains saddled by more than €200bn of non-performing loans (NPLs) and has barely started to increase lending again after the end of a bruising triple-dip recession. It has also raised questions about the effectiveness of regulators at the Bank of Italy and Consob, the stock market regulator. Italian officials have defended the solidity of their banks and the work of their regulators, and pointed to new reforms of small bank governance. But Francesco Galietti, an analyst at Policy Sonar in Rome, said: “If there was such a kerfuffle with four regional banks, what will a large resolution look like?”

As for Banca Etruria, after the rescue it was placed under new management, and stripped of its bad assets.

“We’re now a new bank. We’re now a solid bank, and we have no NPLs, which means complete tranquillity,” says Roberto Bertola, its new chief executive.

But this is of little consolation to retired shoe factory worker Floriano Fontani, 70, and his wife Rosa Paperini, 66. They are angry at the loss of their €20,000 investment in a convertible bond Banca Etruria issued in 2011, which yielded 7 per cent. The debt automatically became equity a year later when the bank needed capital, and the shares are now worthless, leaving Ms Paperini feeling betrayed by the bank where she has been a client for half a century.

Back at the mayor’s office, Mr Ghinelli uses a saying in the local dialect to sum up what a bad omen the affair is for a new era in European banking: “This is no way to swim, said the drowning man.”