ROME — If there's one person in Brussels who is lending the populist Euroskeptics a helping hand while hurting her own political ambitions, it's Margrethe Vestager.

The EU's competition chief, who joined the European Commission presidency race last month as part of a team of Liberal candidates, opened a rift with the Italian government and banking officials by blocking a bank rescue in 2015. Last month, an EU court overturned that decision, reviving the controversy and setting up a new fight over compensating investors.

The affair began with a 2014 rescue for Tercas, a local bank in the southern region of Abruzzo, using a banking industry fund but with a green light from Italy's central bank. In late 2015, Vestager deemed the move illegal under EU rules on state aid, on the grounds that the government controlled the industry fund.

That decision was wrong, the EU's General Court ruled last month. But the ruling came too late for four other regional banks, including Banca Etruria, put into administration in 2015, and two more in 2016.

Barred from using the industry fund, Italian authorities put them into resolution procedures and imposed losses, as required under EU rules, on some 200,000 stock and bondholders, many of them ordinary savers.

"Sticking to the facts, the General Court's judgment shows the decision forced by the Commission made the resolution of certain banking crises extremely costly and complex" — Giovanni Sabatini, ABI's director general

After an initial clash with Vestager, Italy’s League-5Star government is now planning to use public money to compensate investors earning up to €35,000 a year and who lost up to €100,000. (Bondholders should get 95 percent of their investment back, while shareholders are looking at 30 percent.) Vestager has reportedly approved the plan, which is a softer version of the initial populist proposal to compensate everyone of the full amount.

Political impact

The case has already had an impact in politics. Italians living in the regions hardest hit by the bank crises have shifted in favor of populist Euroskeptic parties, a trend widely confirmed in last year's general election. The March 19 court decision only adds to the resentment of Brussels.

"The EU court's decision shows that just like the 5Stars said at the time, the interbank fund could have been used to recapitalize Etruria and the other ailing lenders ... We had carved out a path that would have avoided hitting savers and destroying thousands of people but no one wanted to follow that way," the populist movement's leader Luigi Di Maio, who also serves as one of two deputy prime ministers, wrote on Facebook right after the Tercas decision.

After the General Court court ruling, the Italian banking lobby ABI called for Vestager's resignation and FABI, the national union of bank employees, accused the commissioner of having killed the rescue of the six other local banks.

Prime Minister Giuseppe Conte floated the idea that his government might seek damages from the EU. "This is a crucial precedent that must lead us to political and legal conclusions on savers that deserve compensation," Conte said after the judgment.

"Sticking to the facts, the General Court's judgment shows the decision forced by the Commission made the resolution of certain banking crises extremely costly and complex," ABI's director general, Giovanni Sabatini, told POLITICO.

'Tangible fallout'

"These decisions had a tangible fallout across the country ... part of which can be quantified as the losses borne by savers and other national lenders," he added. "Another part, and namely the impact on international investors' confidence in Italy's banking sector, isn't even measurable."

"The Commission took a legal risk with Tercas and they were wrong on the imputability condition," said Jacques Derenne, a partner at law firm Sheppard Mullin in Brussels. He was referring to the argument that the decision to grant aid should be attributed to the state rather than the industry fund.

"Sometimes [the argument] works, sometimes it doesn’t, but it’s the result of a legal assessment, not a political one," Derenne said.

The European Commission is still considering whether it will appeal the decision to the bloc's Court of Justice.

The Commission "has always been open to deposit guarantee schemes such as the Italian [industry fund] to intervene in favor of banks on a voluntary basis as it doesn't raise any state aid issues," a spokesperson said last week. The objection from Brussels was to how Italy made use of a fund that lenders were obligated to pay into.

"Since the EU court's decision on Tercas we've sped up the process to finalize the decree to compensate savers and I'm sure our finance minister will sign off" — Alessio Villarosa, 5Star politician

Pier Carlo Padoan, who was Italy's finance minister at the time, believes that not only "a mini bank crisis could have been avoided if the [private] fund could have been used for Tercas," but it's possible that "the management of the four regional banks crises [at the end of 2015] would have been different."

"This was a grave mistake by the EU institutions and in certain instances I must say President Jean-Claude Juncker and certain commissioners were more understanding than others," Padoan told POLITICO — seeming to contrast them with Vestager, who carried out negotiations with Italy over the attempted rescues.

"We’ve had to cope with more stringent banking rules and at the same time tougher state aid rules, too," he said. "This had an enormous political and social fallout across the country."

5Stars' gains

The 5Stars, then still an anti-establishment opposition, gained popularity with their activism alongside the savers, and criticism of the center-left government that included Padoan.

The suicide of a pensioner, Luigino D'Angelo, who lost his €75,000 savings in holdings of Banca Etruria debt, became a symbol of the plight of the people caught between greedy bankers and dogmatic bureaucrats in Brussels.

The former Italian government put aside €100 million to partially reimburse some defrauded savers. Now the populist leaders plan to spend up to €1.5 billion of government funds to repay losses of all bondholders, estimated to number 200,000.

Giovanni Tria, the finance minister, has been reluctant to sign off on the plan under Vestager's warning that the compensation could be seen as illegal state aid.

Speaking to lawmakers in Rome last month, the commissioner said it should be up to the banks to reimburse clients who were defrauded through the sale of risky financial investments. If this is not possible, according to Vestager, the compensation by the government must be targeted to victims, not generalized for all investors.

The Commission has worked alongside Italian authorities, the spokesperson said, to set up "measures to compensate retail investors that were the victims of missold bonds for social reasons [and] we are also in constructive contact with Italian authorities on the new proposed fund to compensate such retail investors."

But the populists want to move quickly, seeking to notch a win ahead of the European election in May. Vestager's loss in court may help them.

"Since the EU court's decision on Tercas we've sped up the process to finalize the decree to compensate savers and I'm sure our finance minister will sign off," said Alessio Villarosa, a 5Star politician serving as treasury undersecretary.

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