Italy's main banks saw their share prices plunge today while bond yields rose sharply as the governor of the Bank of Italy, Ignazio Visco, warned the country was "a few short steps away" from losing the "asset of trust" as the nation's political crisis continued.
UniCredit SpA shares were down 5.70% to €13.96 on May 29, while Unione di Banche Italiane SpA saw its share price fall 4.37% to €3.28 per share and Intesa Sanpaolo SpA was down 3.96% to €2.45 per share, though Banca Monte dei Paschi di Siena SpA's stock rose 1.23% to €2.47 a share.

Italian bonds also suffered sharply when the yield — which moves inversely to price — on the country's two-year bond reached its highest level in more than four years, breaking through 2.7%, though it dipped sharply by mid-afternoon to 2.05%. The yield on 10-year bonds came down to 2.96% from 3.38%.
Meanwhile, the FTSE MIB benchmark index for the Borsa Italiana SpA was down 2.40% to 21,405.85.
Italian President Sergio Mattarella |
Political turbulence
The moves followed the actions of Italy's President Sergio Mattarella on May 27, when he blocked the appointment of Paolo Savona, the euroskeptic candidate for finance minister. The latter had been put forward by Italy's putative government, the coalition between the anti-establishment Five Star Movement and the far-right League, leading to the collapse of their bid to form a new government. The two parties failed to put forward an alternative candidate, and the leader of the Five Star movement called for the president's impeachment.
Mattarella chose Carlo Cottarelli, a former IMF official, to lead Italy's technocratic government in the interim — a decision that has been attacked by the two populist parties, meaning that another general election could come as soon as August if Cottarelli fails to win a vote of confidence. Five Star, the League and Forza Italia are expected to vote against it.
Visco, in an annual speech, said any new government must respect EU treaties that oblige eurozone countries to stick to strict debt and deficit limits — a clear warning to the Five Star movement and the League, which have promised to cut taxes and boost spending in government.
UniCredit CEO Jean-Pierre Mustier tried to calm the market May 29, when he told Bloomberg TV that the sell-off in Italy's government debt was "not justified — we are in a situation today where the fundamentals of Italy are very good." Yet analysts feared that the situation was likely to worsen.
Italy becoming 'uninvestable'
Bank of America Merrill Lynch analyst Alberto Cordara said the sell-off in banks' stock had little to do with the fundamental strength of the banks' balance sheets.
"It is a macroeconomic thing — investors are selling everything that they can in Italy as a whole," he said. "Italy's banks hold much less government bonds than they did in the past, but it is a general feeling that Italy is becoming uninvestable."
Credit Suisse analyst Carlo Tommaselli said in a note that the fundamentals of Italian banks were indeed sound, but warned that the pressure on them was likely to continue.
"Italian banks' fundamentals are sound but further sovereign spread widening could pose risks for funding cost," he wrote. "Political uncertainty could also pose risks for the nonperforming exposures reduction pace and the cost of risk."
The spread between Italian and German government 10-year bonds — an indication of risk — was at its highest since December 2013 at 232 basis points, he noted. Tommaselli added that following the president's intervention, the anti-establishment parties could gain further consensus in Italy, "especially Lega."
Hermes Investment analyst Filippo Alloatti said that despite progress by Italy's banks in increasing capital, reducing bad loans and cost cutting in recent years, the political crisis would be damaging.
"The longer the volatility drags on, the likelier it is that it will eventually impact the fundamentals," he said.
Contagion risks limited
Banks in Portugal, Spain and France also saw significant losses in market value May 29 owing to their exposure to Italian government bonds. Yet despite the political turmoil and resulting damage to the stock market in Italy, the contagion risk for other EU periphery economies and their banks is limited, according to Tomas Hirst, a credit analyst at independent research firm Creditsights. He also argued that the situation now is different from the euro sovereign crisis, as the European Central Bank has, in the meantime, proven its ability to support periphery countries via programs such as the Outright Monetary Transactions and quantitative easing.
"One of the major effects of the [ECB's] asset purchase program has been to take some cross-border banking exposure off the balance sheets, so to some extent Europe and the rest of the periphery is much more insulated from Italian banking issues than it has been in the past," Hirst said.
Dennis Shen, sovereign ratings analyst at Scope Ratings, said: "The economies in Europe are in a considerably better position than during the debt crisis of the early 2010s and we do not think that this is going to be comparable to what happened then in terms of all the countries getting close to default or anything on that scale."
The markets are likely to remain highly volatile at least for a couple of months, Shen said, because "they are not going to let the new elections happen before the end of the summer."


