Nationalizing your biggest
bank is never a happy affair but, if you have to, do it quickly.
Ukraine moved swiftly last
weekend -- alongside the International Monetary Fund -- to clean up its banking
system by taking over Privatbank, securing a stable deal for depositors and
preventing systemic risk.
There was a $5.5 billion
capital shortfall to be filled, a big hole for such a fragile economy with only
$15 billion in central bank reserves. Privatbank accounts for half of payments
in Ukraine's banking system and one-fifth of its banking assets. Deposits
exceed $8 billion, of which three-quarters are retail and they're clearly the
priority here.
The European Union and Italy
should take note as they struggle with a last-gasp solution for Banca Monte dei
Paschi di Siena SpA. A crucial element is persuading retail holders of junior
debt that they should swap it for equity.
That would cut the amount Monte
Paschi has to raise from a parallel stock offering -- the hardest part of its 5
billion euro ($5.2 billion) fund-raising plan.
It needs the capital to defray
30 billion euros in non-performing loans, thereby allowing the world's oldest
bank to battle on.
Upper Tier II issued in 2008
for 2.16 billion euros holds the key to survival
The EU's rules over state involvement
in bank bailouts, the Bank Recovery and Resolution Directive (BRRD), have
created an almost impossible situation where all the involved parties are
stumbling to get out of each other's way, and the state cannot act alone. But,
as usual, how you handle the debt-holders is the key.
By contrast, Ukraine has been
able to move decisively by bailing in the private bond and equity owners. It
will bail in the three Privatbank senior eurobonds, which comprise slightly
more than 5 percent of liabilities at $555 million.
There is a lingering fear
that these bonds could then be converted into equity, thereby wiping out the
holders, although international creditors are unlikely to take that lying down,
according to Oksana Reinhardt of MINT Partners.
Ukraine will need to be
cautious about treating international holders of senior debt in the same way as
Privatbank's former owners, who received 97 percent of its corporate
loans and owned many of the bonds. The country plans to tap international bond
markets in about a year's time, so needs to keep some goodwill.
Despite the need for Ukraine
to iron out some last wrinkles, it still offers a model of sorts for Europe.
The EU also wants to see bank rescues conducted by making sure the private
sector shares the risk.
In fairness, Italy's biggest
problem revolves around protecting domestic retail bond investors, so the
situations are different. If Monte Paschi doesn't succeed this week with its
debt-for-equity swap, then a state rescue of at least 15 billion euros is
waiting.
That still wouldn't provide
the decisive action taken by Ukraine, and will involve a messy compensation
deal for retail junior debt holders -- who should never have been offered this
stuff in the first place. It's all incredibly confusing as different parts of
the rescue plan hang on each other, dramatically increasing the risk of
failure.
Of course, if Italian press
reports prove valid that Qatar, China and the Italian Post Office are prepared
to step in with capital, then it may just succeed. But it really didn't need to
be this difficult. The post-crisis EU regime on preventing state interventions
has proved as damaging as the illness.
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