"The risk is that Unicredit will no longer be as before: not so much because it loses its Italian spirit but because it loses the centrality of Italy". This is the opinion of Marcello Messori, a well-known economist, full professor of Economics of the monetary and financial markets at the University of Tor Vergata-Roma 2, collaborator of the "Corriere della Sera" and former president of Assogestioni. In this interview with FIRSTonline he explains the reasons and effects of collapse of Unicredit on the stock exchange after the launch of the capital increase but also draws more general considerations on the Italian banking system ("It's a model to be reviewed"). As for the way out of the crisis that is affecting Europe and calling into question the euro, his idea is very clear: we need to transform the state-saving fund into a real bank that has unlimited means to support the government bonds of the European countries in difficulty. Provided that Mrs. Merkel is convinced in time. Here is the interview.
FIRSTONLINE- Professor Messori, the announcement of the 7,5 billion euro capital increase cost Unicredit stock a 38% loss of its stock market value in just five sessions with the virtual evaporation of 4,6 billion euro of capitalisation: did you expect such a market response?
MESSORI – A sharp fall in the Unicredit share on the stock market was foreseeable due to the extent of the increase (both in absolute terms and in relation to the bank's capitalisation), but also due to other reasons. Consider, for example, that the operation in progress follows a recent indirect recapitalization (cashes) and two previous and substantial capital increases. Furthermore, the discount on the price was very significant; it was a choice, perhaps justified by the market situation, but still abnormal compared to other recapitalizations of Italian and European banking groups. Having said all this, a reduction of the magnitude of that suffered by Unicredit was not foreseeable.
FIRSTONLINE – Some say that the collapse of the Unicredit share on the Stock Exchange depends mainly on technical reasons, some on the absence of real buyers on the market and some on the onslaught of speculation Consob is investigating: which of the three interpretations is the which convinces you the most?
MESSORI- As I have already said, various factors weighed on the Unicredit operation. However, I remain convinced that, beyond the technical aspects and the unfavorable market situation, such a conspicuous drop in the share on the stock exchange was conditioned by the delay with which the bank's management perceived the need for further recapitalisation. It is clear that an operation of this size cannot be justified either by the fact that the European authority EBA has imposed stricter rules on public securities or by the fact that Unicredit has been classified as a bank with systemic impact (SIFI).
FIRSTONLINE – However, Consob has launched an investigation to understand whether privateer operations of speculation have also influenced the Unicredit stock: do you feel comfortable excluding this aspect?
MESSORI – I suspend the judgment pending the results of the Consob investigation. When it comes to speculation, however, we must understand. It is one thing if irregular operations on the Unicredit stock emerge, which will have to be sanctioned; another matter is whether the market has bet downwards on Unicredit, deeming the timing and method of the capital increase unsatisfactory. One can obviously disagree with the judgment of the market; in this case, however, there would be nothing strange or reprehensible in what happened.
FIRSTONLINE – There are those who think that the shareholding reorganization resulting from the turbo-increase in capital means that Unicredit will no longer be the same and that the Italian nature of our leading bank is no longer so sure: what would be the effects of an earthquake in type?
MESSORI – To express a considered judgement, we have to wait for the conclusion of the recapitalization process. However, there is a relevant possibility that a profound reallocation of Unicredit's shareholding will occur. Suffice it to consider that some of the international investors already present in the property, a part of the major national shareholders (starting with the foundations of banking origin) and various private shareholders do not seem willing to subscribe to all the shares within their competence. Basically, the future shareholding composition of Unicredit tends to be in the hands of the guarantee banking syndicate. Therefore the risk that Unicredit ceases to be the reality, known up to now, is very strong; and this is a reason for serious concern because, if there were a restructuring of ownership of Unicredit managed by investment banks, our economy could lose a key player in the difficult game for growth.
FIRSTONLINE – What does it really mean if the Italian flag no longer flies over the first Italian bank?
MESSORI – The greatest danger is not the loss of Unicredit's Italian identity but the loss of its centrality in Italy and in the countries linked to the Italian economy. Despite its current difficulties, Unicredit remains the most European of our banking groups and remains a solid and solvent reality at national and international level. For a country like ours, which has companies (even successful ones) that are highly dependent on bank loans and which must defend and strengthen its international position, it is essential to have banking groups well rooted in Europe but with their brains in Italy. If Unicredit ceased to fulfill this role, it would be a big problem; our financial sector would increasingly depend on a single banking group (Intesa-San Paolo). Furthermore, the loss of Unicredit's centrality would be accompanied by the mockery of a change in ownership control at bargain prices. As things are going, today it is possible to acquire significant positions in the capital of Unicredit at such a low cost that it is within the reach of many European and international intermediaries.
FIRSTONLINE – What more general reflections does the Unicredit case raise on the Italian banking system? Are our banks no longer that jewel we thought a couple of years ago?
MESSORI – The traditional model which, between the end of the 2008s and 2007, allowed Italian banks not to expand their financial assets but to obtain profitability almost in line with that of Europe thanks to the management of household financial wealth is going into crisis and the strong local roots in relation to businesses. This quasi-monopoly of our banking groups in the domestic financial market protected them during the financial crisis of 09-'XNUMX. However, the economic recession and the sovereign debt crisis in the European Monetary Union have broken the mechanism. Bad loans and the cost of funding have exploded, making the structural and accentuated gap between loans and deposits (funding gap) difficult to manage; furthermore, the fall in value and the increased riskiness of Italian public debt securities weighed down on the assets of our banks. In the near future, the profits of the Italian banking sector will be much lower than those achieved up to the early XNUMXs. It is our peculiar bank-centric model that has entered into crisis. The most immediate risk is a heavy credit crunch on the real economy; structural risk is a weakening of the contribution of financial factors to the "real" growth of our economy.
FIRSTONLINE – What effects will the Unicredit case have on the other banks most in difficulty?
MESSORI – I think that, in the other Italian banking groups with capitalization problems, the management component most reluctant to launch capital increases on the market will strengthen. If this trend were confirmed, there would be only two ways out: the disposal of non-strategic assets to raise cash or the reduction of the balance sheet assets components (deleveraging). These two ways out would have a very different impact on the Italian economy.
FIRSTONLINE – What is that?
MESSORI – The sale of non-essential assets or equity investments would be a rationalization choice, with no negative consequences on loan flows to businesses and households. Deleveraging processes, on the other hand, would result in cutting funding to the real economy. The price, paid by the country to strengthen the capital relations of the banks, would be the credit crunch and, therefore, a new and powerful obstacle to economic growth.
FIRSTONLINE – What does it mean to rethink the traditional model of the Italian bank? Aren't the propensity for retail and its link with the territory virtuous aspects?
MESSORI – Of course they are positive aspects; and these are not the features of banking specialization that need to be reviewed. The point to rethink concerns the quasi-monopoly held by the Italian banking sector in the intermediation of household financial wealth. This intermediation can no longer be exclusively used to make traditional loans to companies and to increase the profitability of banks. Instead, it is essential to allocate a growing share of this wealth to support innovations and the dimensional leaps of successful companies. If the challenge for our economy is to get back on a growth path, banks must play their part by assuming a more dynamic role in the financial market. The alternative is stark: either our banks become capable of providing new financial services to successful businesses or they must give up their quasi-monopoly and make room for non-bank financial operators.
FIRSTONLINE – Don't you think that in the face of the crisis in Italian banks one can imagine recourse to forms of partial and temporary re-publicisation as the Anglo-Saxon world did but also as happened with Dexia?
MESSORI – Beyond the public debt constraints that prevent the state from expanding directly into the economy, I don't think we're at this point. I see no signs of systemic insolvency in our banking sector, comparable to the situation in the US or the UK three years ago. Intesa-SanPaolo is a banking group with adequate assets and with strong roots in the Italian economy. Unicredit itself remains a solid bank that has no solvency problems. As regards other large Italian banks for the domestic market, it is difficult to generalize; it is about studying the problems on a case-by-case basis. Therefore, I do not see the need for public bailout interventions. The crisis certainly obliges us to be pragmatic and not to remain slaves to theoretical orthodoxy; but what sense would it make today to demand an intervention by the Treasury or even by Cassa depositi e prestiti in Italian banks? Instead, there is a question, which cannot be escaped.
FIRSTONLINE – Which one?
MESSORI – The question is: is there an element that could lead to the collapse of the Italian banking sector or, better to say, the European one? And the answer is yes: the bankruptcy of the sovereign debts of the peripheral countries of the European Monetary Union (which include Italy and Spain). This response implies that, if there is a banking emergency, it must be tackled at a European level and not just in Italy. In part, this is what Mario Draghi's ECB is doing with an unlimited supply of liquidity to the European banking sector at very low interest rates (1%) and against very heterogeneous guarantees.
FIRSTONLINE – Unfortunately it doesn't seem that the abundant liquidity benefits the real economy or supports the public debt. And let's not forget that the banks have to deal with the extremely heavy recapitalization request launched by the EBA.
MESSORI – It is true that we are in an emergency situation which leads us to think in terms of "à la guerre comme à la guerre". I don't think, however, that dirigisme is the best way out. If anything, we should ask ourselves why the European institutions intervene on the effects and not on the causes of the crisis. In particular, so that the ECB can protect the liquidity of the banking sector but not intervene on the source of banking risk: the prices of public securities of peripheral countries. As for the decisions of the EBA, it is obviously legitimate to critically discuss the timing and methods of its requests for recapitalization of the European banking sector. However, we cannot forget that, at the beginning of the summer of 2011, the EBA had been criticized precisely because it had carried out stress tests on the European banking sector without attributing risks to public securities held in bank balance sheets in a stable form; and that, when it considered moving to a market valuation of these securities, it submitted the proposal to the European Council. In July 2011 all the governments of the European Union, including the Berlusconi government, approved this proposal.
FIRSTONLINE – We need a bazooka plan that places unlimited means at the disposal of Europe to face sovereign risk and support the public debt of the most exposed countries, but the ECB is not the Fed: how do we get out of this?
MESSORI – I continue to think that the most suitable vehicle for managing the public debt problem of countries in difficulty is the bailout fund. However, it is a question of providing this fund with potentially unlimited resources and of preventing its debt rate from weighing on the public budgets of the individual member states. It is possible to achieve both results without any revision of the Treaties. It is simply a question of amending the statute of the state-saving fund, transforming it into a bank. As a bank, like all other European banks, this fund would have unlimited access to ECB funding. I am convinced that, if we proceeded in this direction, effective financing from the ECB would not even be necessary: the announcement effect would be enough to induce the markets to change their bet on the stability of the euro.
FIRSTONLINE – And who convinces Mrs. Merkel? Will our two Super Marios be enough?
MESSORI – Here we are faced with what economists call a time inconsistency problem. It is reasonable to expect that, once it has been ascertained that the new treaty implements the so-called "fiscal compact" and places the public budgets of the various eurozone countries under German control, Germany too will accept reasonable solutions to deal with sovereign risk: a potential of the ECB to the new bailout fund in the short term, the issuance of Eurobonds in the medium-long term. The problem is whether this will happen in time to save the euro. Timing is decisive; and the risk of the system crashing due to time inconsistency is not small. The European wisdom and credibility of Mario Monti and Mario Draghi still leave us hoping for a happy ending compared to the nightmare of these days. But how much useless and costly effort…
