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LONDON, July 1 (IFR) - Italy this week exploited the stormy aftermath of the shock UK referendum result, concocting its latest attempt at rescuing its banks while markets were distracted with more pressing matters.

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

For months now, the Italian government has been desperately trying to fix its banking sectors crippling bad loan problem while avoiding sharing the burden with bank creditors.

Atlante, the cobbled-together rescue fund, has all but been exhausted shoring up Banca Popolare di Vicenza and Veneto Bancas equity raises, leaving nothing to complete its original mission: lifting banks bad loan burden.

Under the new scheme, a bank can ask the government to guarantee its bond issues, ensuring that it can raise money even in troubled markets. But the offer only applies until the end of this year, and only banks with solvent balance sheets will be eligible, according to Reuters.

The scheme wasnt Italys first choice, and comes after the countrys attempts to orchestrate a 40bn bank rescue were firmly 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, is not the issue; the European Central Bank is providing plenty of that. It is a lack of capital that lies at the heart of the sectors problems.

That Italy is using Brexit and the potential fallout from it says a lot. Alarm bells should be ringing given its the only country to have taken such steps so far. Even in the UK, where you might expect banks to have been hardest hit, no such measures have been taken.

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

The banks share prices tell a million stories. UniCredit is down over 63% year-to-date, Banca Monte dei Paschi di Siena more than 68% lower and Intesa Sanpaolo off almost 46%. While the picture 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 UKs decision to leave the EU, but one thing is sure: Italy will not be the poster child for how to sort out your banking sector. (Reporting by Helene Durand, Editing by Philip Wright, Julian Baker)



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