OPINION-Italy, or how not to deal with a banking problem

By Helene Durand

LONDON, July 1 (IFR) - Italy this week exploited the stormyaftermath of the shock UK referendum result, concocting itslatest attempt at rescuing its banks while markets weredistracted with more pressing matters.

Yet the news that the European Commission has authorised anItalian government plan to guarantee liquidity for banks in theevent of a financial crisis in the eurozone is baffling at best,but mainly risible.

For months now, the Italian government has been desperatelytrying to fix its banking sector's crippling bad loan problemwhile avoiding sharing the burden with bank creditors.

Atlante, the cobbled-together rescue fund, has all but beenexhausted shoring up Banca Popolare di Vicenza and VenetoBanca's equity raises, leaving nothing to complete its originalmission: lifting banks' bad loan burden.

Under the new scheme, a bank can ask the government toguarantee its bond issues, ensuring that it can raise money evenin troubled markets. But the offer only applies until the end ofthis year, and only banks with solvent balance sheets will beeligible, according to Reuters.

The scheme wasn't Italy's first choice, and comes after thecountry's attempts to orchestrate a 40bn bank rescue werefirmly rejected by the Commission, and rightly so.

But the new government guarantees will not solve anything.Funding, unlike in 2008/2009 and the 2011 sovereign crisis, isnot the issue; the European Central Bank is providing plenty ofthat. It is a lack of capital that lies at the heart of thesector's problems.

That Italy is using Brexit and the potential fallout from itsays a lot. Alarm bells should be ringing given it's the onlycountry to have taken such steps so far. Even in the UK, whereyou might expect banks to have been hardest hit, no suchmeasures have been taken.

Even better, Lloyds and Santander UK have already accessedthe bond market in a show of force. This is testament to theactions of the UK regulator, which has forced severe writedownsin recent years. Italy, on the other hand, was dawdling and isnow stuck.

The banks' share prices tell a million stories. UniCredit isdown over 63% year-to-date, Banca Monte dei Paschi di Siena morethan 68% lower and Intesa Sanpaolo off almost 46%. While thepicture is far from pretty for UK banks, they have fared better,with Lloyds down some 25%, Barclays off 38% and RBS 47% lower.

There are many lessons that will be learned from the UK'sdecision to leave the EU, but one thing is sure: Italy will notbe the poster child for how to sort out your banking sector. (Reporting by Helene Durand, Editing by Philip Wright, JulianBaker)