The man who saved the euro teams with Europe’s most polarizing bank CEO to save the world’s oldest bank

Former star UBS investment banker and current UniCredit CEO Andrea Orcel has struck a sweetheart deal with Prime Minister Mario Draghi that could help solve the country’s thorniest financial headache—the future of Monte dei Paschi di Siena—and be quite profitable for his bank in the bargain. 

The 2016 collapse of the world’s oldest lender made MPS the highest profile victim of the sovereign debt crisis. Now, with Italy already among the slowest-growing industrial countries, the enormous economic damage wrought by the pandemic risks exacerbating its problems.

Facing the specter of a banking collapse just as his country is clawing its way out of the COVID crisis, Draghi, a former Goldmanite and European Central Bank president, is now prepared to let Orcel pick and choose which assets he takes and thus largely dictate the terms, or “perimeter,” of the deal. Finding a long-term solution for the nationalized lender and driving further consolidation within the sector clearly take higher priority than extracting better terms for the head of Italy’s technocratic government. 

“Given the timing and given the ability to carve the perimeter, Monte dei Paschi is the best option and the only option on the table at this point,” Orcel told analysts on Friday.

Draghi, who single-handedly saved the euro in 2012 after famously saying the ECB would do “whatever it takes” to protect its currency, knows he has to make use of the current lull in interest rates to recapitalize his country’s lenders before another crisis hits. 

He’s been aided recently by two major deals that helped eliminate incorporate smaller, weaker banks into larger healthier ones. Intesa Sanpaolo acquired domestic rival UBI, while France’s Credit Agricole expanded its Italian footprint by purchasing Credito Valtellinese. Both deals were unusual in that they were unsolicited in nature.

A ward of the state, Monte dei Paschi is the biggest and most toxic bank asset that remains.

Too good to refuse

The UniCredit boss is no stranger to hard bargaining. Feared and envied by his peers, the swashbuckling M&A banker with the debonaire appearance and flawless English sued Banco Santander for €112 million for its 2019 decision to rescind its offer for him to run the Spanish bank, an offer for which he had quit his job as head of UBS’s investment banking division.

For the banker who became UniCredit chief executive in April, the opportunity to rebalance his bank’s geographical center to the wealthier northern regions around Florence, Venice, and Milan at little cost was an opportunity too good to refuse. Orcel told analysts that the deal could add nearly 4 million clients to his bank’s current 17.4 million.

“We are able to combine the two franchises with minimal overlap,” he said. Asked how he would then achieve cost cuts, Orcel replied simply he would remove the riskiest assets before merging the two lenders: “You just don’t include those costs,” he said. 

Zero risk

Unlike the case of Greece or even Spain, Italy’s debt is the only one that presents an existential risk to the single European currency. Overall, it owes more to creditors than much larger Germany, Europe’s largest economy. 

Its precarious finances prompt fears that the dreaded European “doom loop”—last seen in the euro area sovereign debt crisis of 2011-2012—could return. By downgrading sovereign bonds, ratings agencies would hurt the solvency of the national commercial banks that own this debt, resulting in further cuts and eventually leading to a negative feedback system that could destroy the financial system’s creditworthiness.

In June, the IMF reported Italian banks were among the largest European users of credit support schemes, at 11% of their loan portfolio versus an EU-wide average of 3.65%, and the gap has only widened as moratoriums elsewhere expired.  

While the sector’s balance sheet appears much more solid relative to a decade ago when the crisis struck, the IMF has warned that nonperforming loans “will inevitably increase due to the extremely challenging economic environment.”

None of this seems to worry Orcel. Not only are the nonperforming loans of MPS ring-fenced such that they would remain entirely with the Italian state, the due diligence he undertakes before the deal is consummated would offer him the opportunity to effectively pick and choose from its €80 billion loan book. He then could simply refuse to include any assets he deems too dubious or that result in an unwanted clustering of risks.

“Do not look at Monte de Paschi as it is. Look at what the perimeter could be,” Orcel explained. “We are bringing in something that starts from zero risk.”