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Italy hopes Venetian intervention draws line under banking woes

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Milan (AFP)

Italy's move to wind up two failing Venetian banks will be costly for taxpayers but should bolster the stability of the country's troubled banking sector, experts said Monday.

The government stepped in at the weekend to liquidate Veneto Banca and Banca Popolare di Vicenza while keeping their viable activities operational under a plan that could cost the state up to 17 billion euros ($19 billion).

Under the deal, the two failing lenders' healthy assets are being sold to Intesa Sanpaolo, Italy's strongest bank, for a symbolic price of one euro.

At the same time, their "bad" or "non-performing" loans are being transferred into a so-called "bad bank."

The healthy assets being taken over by Intesa represent a workforce of 9,960 in Italy and a further 880 abroad, as well as a total 960 branches.

As part of the intervention, across the new Intesa group as a whole some 600 branches will be closed and 3,900 people offered voluntary redundancy, the bank said Monday.

The deal "makes it possible to avoid the serious social consequences that would have otherwise derived from compulsory administrative liquidation proceedings for the two banks," Intesa said.

'Domino risk'

The rescue "will safeguard the jobs at the banks involved, the savings of around two million households, the activities of around 200,000 businesses financially supported and, therefore, the jobs of three million people in the areas which record the country's highest economic growth rate," it said.

Credit Suisse analysts described the deal as "a happy ending" for Italian banks in general because it lowered the risk of a systemic crisis, and for Intesa in particular, because of the assets it acquired.

Intesa chairman Gian Maria Gros-Pietro said the state intervention had avoided the risk of a "domino effect" for the rest of the banking sector.

Had Italy's other banks been left to finance a resolution of their Venetian peers, several of them would have encountered difficulties raising the necessary funds, he said.

The European Commission approved the state-financed rescue after Italy argued that it was necessary to avoid significant damage to the economy in Veneto, the country's most prosperous region.

Italy's central bank, Banca d'Italia, said it would be business as usual at the two Venetian banks' branches.

"Clients are not affected by this move. All banking operations will proceed as normal, but under the responsibility of Intesa Sanpaolo," it said.

Intesa said it would "allocate 60 million euros in total as restitution to small savers who hold subordinated bonds issued by the two banks."

- Good step -

Intesa Sanpaolo said the acquisition of the two banks would be "fully neutral" to its core "Tier 1" capital ratio and dividend policy.

Under the rescue package, the government is paying five billion euros to Intesa to cover the costs of integrating the two banks, restructuring them and laying off employees.

The Italian government will also provide state guarantees worth up to 12 billion euros to cover potential losses at the "bad" bank.

LC Macro Advisors chief economist Loronzo Codogno said it was "a solution that preserves financial stability (at a potentially large cost for Italian taxpayers) and makes a good step in the direction of solving the remaining issues of the Italian banking sector".

The move would take 18 billion euros of bad debt out of the Italian banking system and help restore the sector's ability to provide much-needed credit to the sluggish economy, he said.

But the former director general of Italy's Treasury Department said the "whole problem should have been addressed long ago and the responsibilities are probably equally shared among Rome, Brussels and Frankfurt.

"The moral of the story is that the longer you wait to address banking issues the worse the situation becomes," he added.

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