Germany criticises Italy deal to wind down Veneto banks

BERLIN (Reuters) - Germany made clear on Monday it did not approve of the Italian government's decision to begin winding down two failed banks and urged the European Commission, which approved the deal, to enforce rules requiring state aid to be limited to a minimum.

Italy started winding down two failed regional banks on Sunday in a deal that could cost the state up to 17 billion euros ($19 billion) and will leave the lenders' good assets in the hands of the nation's biggest retail bank, Intesa Sanpaolo.

"If banks are unprofitable, it is better to let them exit the market than keep them artificially alive with precautionary recapitalisation," Finance Ministry spokeswoman Friederike von Tiesenhausen said, stressing that she could not comment on individual cases.

"The use of state aid should be avoided as much as possible in bankruptcy cases," she said, adding:

"In insolvency proceedings too, the use of state aid should be avoided as much as possible. It is the task of the European Commission to ensure that state aid is limited to a minimum and to prevent the circumvention of winding down rules through national insolvency programmes."

Italy will pay 5.2 billion euros to Intesa, and give it guarantees of up 12 billion euros, so that it will take over the remains of Popolare di Vicenza and Veneto Banca, which collapsed after years of mismanagement and poor lending.

The deal allows Italy to solve a banking crisis on its own terms, ensuring the two Veneto lenders are not wound down under potentially tougher European rules. The cost for taxpayers, however, is hefty.

Germany wants people who put their savings into bank bonds to suffer losses as a condition for state support. Italy and other euro zone members prefer to shield institutional investors and ordinary citizens.

($1 = 0.8946 euros)

(Reporting by Madeline Chambers and Paul Carrel; Writing by Joseph Nasr Editing by Jeremy Gaunt)