EU Approves Italian Contingency Plan To Guarantee Bank Liquidity

The European Commission has authorized  Italian government plan to guarantee liquidity for banks in the event of a financial crisis in the euro zone's third-largest economy, an EU executive spokeswoman said on Thursday.

The Commission approved the scheme last Sunday, another EU official said, days after Britain voted to leave the European Union, triggering a sell-off in European bank stocks, especially in Italy, home to roughly a third of the euro zone's bad debts.

The scheme, worth up to 150 billion euros ($167 billion) according to some media reports, would only be triggered in circumstances similar to the euro zone debt crisis of 2011, when some banks in the currency bloc needed to be bailed out and the interbank market had ceased to function.

"Given the financial markets turmoil of recent days, the government saw it fit to prepare for all scenarios, even the most improbable, to be ready to step in to protect savers," the Italian Treasury said in a statement.

Italy's new bank bailout fund - dubbed "Atlas" - raises questions about its viability.

Italy's new bank bailout fund - dubbed "Atlas" - raises questions about its viability.

Italian officials stressed they did not expect Italy to suffer a 2011-style meltdown in confidence but said it was prudent to plan for a worst-case scenario. Italian bank shares ended up 2 percent on Thursday after news of the scheme.

Under the scheme, a bank can ask the government to guarantee its bond issues, ensuring that it can raise money even in troubled markets, but it only applies until the end of this year and only to banks with solvent balance sheets.

"In this way, they can issue bonds that, with the assistance of the public guarantee, are similar to an Italian government bond," said one source familiar with the scheme.

Under EU rules, government guarantees may only be given to bank bonds maturing within three months to five years.

"There is no expectation that the need to use this scheme should arise," the European Commission spokeswoman said.

The Treasury statement added that the guarantees may only be used for new senior bonds issued by healthy banks.

Rome has said it is concerned that Italian banks, which hold 360 billion euros of bad loans, risk attack by hedge funds betting that market turmoil, increased by last week's Brexit vote, could tip them into a full-blown crisis.

Credit:Reuters/Bloomber/FT