Italy’s desperate struggle to fend off contagion
By Patrick Jenkins
Back in the spring, when Giulio Tremonti, Italy’s finance minister, and Bank of Italy governor Mario Draghi were frantically urging the country’s banks to raise fresh capital and strengthen their balance sheets, it was an uphill battle.
The banks squealed, squirmed and resisted.
With some justification, they argued that they should be seen through a different lens from many foreign rivals in the wake of the financial crisis. Unlike lenders in the US, the UK, Ireland or Spain, the banking system in Italy had not lent into a speculative property bubble. There was no looming bad debt disaster.
Eventually, with the exception of
UniCredit, they caved in to the pressure and have since raised a combined €10bn of fresh capital. Last week,
Monte dei Paschi successfully completed its rights issue, the last in the wave, raising €2.15bn.
So imagine the banks’ frustration over the past few days. Their share prices have plunged and bond yields have soared as investors have taken fright, essentially predicting that
Italy’s banks will be the next victims of the eurozone sovereign debt crisis. Is that analysis right?
On one level, it could be. What the market has focused on of late is the worrying parallel between banks in Greece and in Italy. Greek banks have been similarly peeved about their plight, having been generally cautious lenders with no big self-inflicted problems. But they are Greek. With their home country in all kinds of trouble, they will inevitably be hurt by two things – the bleak outlook for the Greek economy and the threat of default hanging over Greek sovereign bonds, which they own in great quantity.
Italians naturally bridle at the idea of being compared with Greece, but at a macroeconomic level, the market is focused on one data point more than any other at the moment: the 120 per cent gross debt-to-gross domestic product ratio the country is expected to show this year, according to the International Monetary Fund though stable, is too close for comfort to Greece’s 150 per cent. It is way more than the 64 per cent in Spain, about which there has been far more investor concern up to now.
If there is concern about the 27 per cent of Greek GDP accounted for by domestic bank holdings of Greek sovereign debt, how much more concerning is the 32 per cent tally held in Italy?
Adding to the market’s nervousness is a perception that Italian banks may not have done as well as some others in European stress tests, the results of which are due to be published on Friday. Assurances from Mr Draghi late last week that Italian lenders would pass the tests by a “significant” margin have fallen on deaf ears.
The continued rout prompted Italy’s stock market regulator on Monday to move to force traders to reveal short selling positions.
This is where the normally steadfast collegiality of the Italian financial system may be breaking down. The country’s regional foundations, which are an essential part of the fabric of society – funding and administering local services – have come under unprecedented strain in recent months. With so many of their assets invested in the banking sector, the foundations have found themselves facing vast cash calls to support the wave of rights issues.
Italian bank dividends – a key source of income for the foundations – have also been slashed.
Under such pressure, it is little wonder that the foundations, via the fund managers that run their investment portfolios, are now said to be lending out more of their holdings – both sovereign bonds and bank shares – to shortsellers, thereby helping exacerbate the bear run.
For the foundations, it is a largely academic issue. These are long-term investors focused on the income the holdings will generate, not their day-to-day value. Any fee income they can make along the way is welcome.
For the
broader eurozone, it is yet another front in the attack on a fragile single currency and the region’s over-indebted governments. It also sends an important message to Europe’s leaders, both political and within the eurozone banks, that the outstanding issue of dealing with Greece’s sovereign debt restructuring cannot be allowed to drift until September, as a frightening number of participants in the talks seem to believe.
For Mr Draghi – who will be elevated to president of the European Central Bank on November 1 – the revived attack on Italian banks, which he thought he had headed off in the spring, adds a personal nightmare to the broader challenge of fixing the eurozone. Other than hope for an uplift from a clean sheet result in Friday’s stress tests, there is little he can do to stem the contagion in Italy. But at the very least,
he must urge UniCredit, whose shares have been the weakest performers of late, to join peers in boosting capital.
Patrick Jenkins is the FT’s banking editor
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Il FT invita caldamente Draghi a chiedere a Unicredit un aumento dicapitale.
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