The Achilles & # 039; Heel for the populists of Italy: weak banks
The Achilles & # 039; Heel for the populists of Italy: weak banks
ROME: As the populist government of Italy approaches a confrontation with the European Union over its budget, the tremors of the financial markets are affecting the country's banking system and threatening the economic growth that Rome wants to stimulate.
The stocks and bonds of Italian banks have suffered strong sales last week, when the Italian government stumbled upon a budget that seems willing to violate EU rules on fiscal discipline. Rome's new ruling coalition, skeptical of the EU, between the 5-star anti-establishment movement and the nativist League has said it aims to A budget deficit of 2.4% of the gross domestic product. Next year, three times what the previous, pro-EU government planned.
The turmoil in Italian politics has sent shockwaves through the financial markets in movements reminiscent of the Eurozone crisis. The WSJ markets reporter, Ben Eisen, answers questions about the latest Italian financial crisis.
Italy's budget plans are a "significant deviation" from the recommended fiscal policies and a "source of great concern," the European Commission, the EU executive, said on Friday. That raised the prospect of a clash between Rome and Brussels.
It is expected that Rome's optimistic forecasts for growth and tax revenues will attract heavy scrutiny from the EU authorities, who fear that the real deficit may end dangerously high for a country with a worrying national debt. The fierce 5-star rhetoric and the League against EU officials have further frightened foreign investors, who fear that the European Central Bank, the ultimate guarantor of the stability of the eurozone bond market, will not support a government that challenges the economic orthodoxy of the bloc.
Despite some stabilization in the markets since Wednesday, after the government promised medium-term deficits, Italian bonds and banks remain under heavy pressure.
"It's almost killing the recovery of the banking sector. And this will be a shock to the economy, "said Nicola Nobile, a Milan-based economist for the forecasting company Oxford Economics. return of the credit crisis that drowned Italy's recovery after the eurozone crisis at the beginning of this decade.
ECB President Mario Draghi warned last month that credit has become more expensive in Italy's economy as a result of market tensions fueled by anti-EU rhetoric emanating from Rome. "Words have created some damage," Draghi said.
Italy's political leaders continue to criticize EU officials charged with enforcing the bloc's tax regulations. The leader of the League, Matteo Salvini, rejected on Wednesday the "threats of Europe" and cited an expression of a militant nationalist poet of the early twentieth century that means "I do not care about anything".
Higher borrowing costs for Italian businesses and households could offset the economic momentum that the government hopes to achieve through fiscal stimulus. The 5 Star wants to increase spending on social assistance by introducing a universal basic income for the poor and unemployed, while the League wants to reduce taxes and reduce the retirement age. While the more radical members of the coalition of both parties struggle with cautious officials such as Finance Minister Giovanni Tria, the government has not met the deadline set by Italian law to publish fiscal and economic projections. It is assumed that the country must send a detailed budget plan to the EU before October 15.
The euro zone is much more stable now than during the existential crisis of 2010-12, when the flight of capital almost destroyed the common currency. Most of their national economies are growing, including that of Italy, although with less momentum than a year ago. However, the political tensions in the region continue to worsen as voters turn against the old center-right and center-left parties that built Europe today. The inherited parties are blamed for the problems that include the economic scars of the crisis years, immigration and security.
UniCredit, based in the Porta Nuova district of Milan and the largest bank in Italy for assets, has to pay much more to attract investors.
Photo:
Geraldine Hope Ghelli / Bloomberg News
The League of Italy and 5 stars are two of the many political movements in Europe that are in the anti-establishment wave. Their radical ideas of spending and tax reduction and their demands for greater national sovereignty within the EU are testing the existing order in Europe, including its financial recovery process of the crisis era.
After spending the last few years trying to write down their mountain of bad loans, Italian banks this year began to embark on new loans. But that effort has been hampered by repeated financial turbulence of which last week was only the most recent. In August, total loans to companies and consumers fell to the lowest level in two years, according to data from the Italian Banking Association.
"Banks are restricting credit. They are struggling to deploy their liquidity, "said Mario Ravagnan, executive director of Ravagnan SpA, an engineering company near Venice.
The market turmoil is affecting the financing costs of banks and their capital buffers. Yields on Italian bank bonds have soared this week. On Thursday, a bond with expiration in January 2023 of UniCredit SpA, Italy's largest bank by assets, was 2.67%, compared to just over 1% when it was first issued earlier this year. .
The cost of insuring against the default of $ 10 million of UniCredit's debt, like that of Italy's second largest lender, Intesa Sanpaolo SpA, has almost tripled since the beginning of the year, in another sign that investors consider banks as risky and probable. Demand greater interest for future financing. UniCredit and Intesa declined to comment.
Italian banks face large loan needs in the coming months and years. Some need to strengthen their capital reserves to satisfy regulators. The sector must also reimburse some 250,000 million euros (289,000 million dollars) of ECB loans due in 2020-21, and financing that can not be left until late.
Earlier this year, Banca Carige SpA had to get rid of a planned bond sale, blaming "market conditions". In July, the Genoa-based bank received a warning about its thin ECB capital coverage, which is pushing it to submit a capital plan to consider a merger.
"Banks must operate in a stable macro environment, and if sovereign uncertainty leads to aversion to market risk, banks will find it more difficult to issue funds at convenient prices, or even issue funds at all," said Paola Biraschi. Analyst at CreditSights.
The sunken value of Italian government bonds already eroded the main capital of the country's banks during the summer, according to a study by Credit Suisse. Less capital makes banks less able to write bad loans or make new ones.
Analysts at Morgan Stanley say that Banco BPM SpA, Banca Monte dei Paschi di Siena SpA and UBI Banca SpA, among the largest lenders in Italy, are the most vulnerable due to the size of their exposure to the Italian government's debt. MPS and Banco BPM declined to comment. UBI said it was cutting its holdings of government bonds and remained relaxed in the face of the current turbulence in the market.
The banking sector in Italy has more government bonds than its counterparts in other major European economies. Italian sovereign debt represents more than 10% of total assets in the country's banks, compared to around 2% in Germany. Italian banks have increased their purchases of government bonds this year, while foreign investors have withdrawn from the market. That leaves the sector increasingly exposed if tensions worsen between the EU and the populist rulers of Rome.
"The situation for banks is really very serious," said Tom Kinmouth, fixed income strategist at ABN Amro Bank.
-Laurence Norman in Brussels contributed to this article.
Write to Giovanni Legorano in giovanni.legorano@wsj.com and Marcus Walker in marcus.walker@wsj.com
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