No Maltese banks are exposed to Monte dei Paschi di Siena, the Italian bank limping towards a government bailout, banking sector sources have said.
“There are no local exposures to Monte dei Paschi di Siena,” a senior source told the Times of Malta in the wake of the Italian government’s decision to bail out the country’s third largest bank.
However, it is the potential impact of Italy’s economic woes, made worse by the banking crisis, upon the eurozone that has economists worried.
Economist Philip Von Brockdorff said Monte dei Paschi was too big a bank to be allowed to fail.
“The Italian government had no alternative but to step in, because if it defaulted, it would have led to general economic collapse.”
The Italian bank, the oldest in the world, failed to raise the €5 billion needed to stay afloat, forcing Parliament to approve the creation of a €20 billion fund to guarantee the stability of the sector.
Shares in Monte dei Paschi were suspended on the Milan stock exchange after the bank said that it had failed to secure a major investor and a debt-for-equity swap had only netted €2.5 billion.
If the bank had defaulted, it would have led to general economic collapse
According to Dr Von Brockdorff, the problems are not new and had been coming for a long time. The economic slowdown since the crash of 2009 has caused many small Italian businesses to close shop and default on loans.
“The bank’s failure to raise capital through private sector investment shows the lack of trust in the Italian economy’s ability to take a turn for the better,” he added.
Dr Von Brockdorff believes the bailout will only contain the problem for a few months unless the Italian economy picks up. It also exposed the fragility of the eurozone, he added.
“The impact for the time being is contained.
“However, the jitters this situation has caused across the continent – Italy is one of Europe’s largest economies – shows the fragility of the euro currency.”
Maltese banking sector sources said that the Italian government’s bailout strategy could help steady the ship by bailing in junior bond holders and compensating retail bond holders in line with the European bailout policy.
“Of course, this will have implications regarding the country’s fiscal targets, but frankly, since other countries have wandered off from their fiscal targets without any penalties inflicted upon them, then why not Italy?” the sources argued.