MNI SOURCES: Italy Plots Overhaul Of EU Fiscal, Banking Rules

--Italy Hopes Populist Landslide Will Swing EU Away From Austerity

By Silvia Marchetti

     ROME(MNI) - Italy's government is rallying support among its allies

elsewhere in the EU to overturn rules which limit fiscal deficits and call for

bank bondholders to be wiped out when lenders collapse, in the expectation that

May's European parliamentary elections will bring big victories for populists.

     Rome is confident the next European legislature will deliver a "pro-change"

European Commission, allowing reform of the EU's Growth And Stability Pact,

together with its Excessive Deficit Procedure, as well as the Bank Recovery and

Resolution Directive, sources at Italy's governing coalition between the

populist 5-Stars Movement and the far-right League told MNI.

     An anti-austerity Commission would allow Rome to expand its fiscal deficit

by more in 2020 than will be the case with its plans for 2019, which sparked a

drawn-out argument with Brussels and the threat of the Excessive Deficit

Procedure, a 5-Stars source said, calling the European elections "Europe's last

chance of survival."

     "The fiscal compact cannot be blindly applied, year-by-year, in scenarios

of weaker growth. How can any country cut debt if the economy is slowing down,

particularly due to external factors as global trade tensions and Chinese woes?"

     Italy also wants to overhaul BRRD to allow for bondholders to be protected

as well as depositors in the event of a bank collapse, said a League official.

At present, BRRD insists that bondholders lose their money by being "bailed in"

when a bank fails, a rule designed to ensure that taxpayers do not have to foot

the bill for collapsing lenders. This presents particular problems in Italy,

where many banks sold bonds to retail investors.

     --NO MORE BAIL-INS

     "We need to fix banks' funding problems triggered by the BRRD directive,

which is catastrophic. Bond and deposit account holders should be shielded from

the bail-in rules, which are currently scaring away both, leading to liquidity

shortages for banks", said the League official.

     "If a bank faces a small problem, that problem immediately turns into a

huge one with a run of bondholders even before any resolution mechanism kicks

into place. It's a vicious circle, the bank ends up unable to issue bonds to

meet required funding needs", argued the source.

     Rome also wants to shake up the European Stability Mechanism, by giving it

unlimited powers and resources for intervention to assist euro area countries in

distress. If it not reformed, the ESM should be dismantled and its role

transferred to a strengthened ECB to act as lender of last resort in the worst

case scenario of EU-wide contagion, said both officials.

     "The ESM isn't working properly. It's totally useless at the moment, unable

to avoid financial shocks across the eurozone," said the League official, while

the 5-Stars source criticised the ESM for only being able to intervene "if a

member state begs for its help and accepts a tough fiscal consolidation plan."

     Rome's ultimate goal is to set-up a lender of last resort to rescue ailing

banks and vulnerable countries in case of need: "It doesn't matter if that is

the ESM or the European Central Bank. We need a EU-wide fund with unlimited

resources".

     In Italy bank deposits are protected by a guarantee provided by private

banks, but this is limited and would be unable to tackle systemic financial

disruption.

     "The bottom line is either we change all current rules, or it is paramount

to move on with the banking union's missing third leg, the deposit guarantee

scheme. We're stuck in a limbo situation now", argued the League official.

     "Europe believes in cross-border bank risks, yet no progress has been made

in building a public backstop with unlimited resources and scope for

intervention", he added.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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