BNY Mellon: Italy, a Rock and a Hard Place
BNY Mellon: Italy, a Rock and a Hard Place
By Neil Mellor – Senior Currency Strategist
By Neil Mellor – Senior Currency Strategist
Banking problems have taken the baton from last year’s budgetary impasse to keep Italian affairs prominent among the wide range of issues currently preoccupying investors.
The common denominator is an economy whose unrelenting underperformance will be difficult to ignore when it comes to setting economic policy in the eurozone this year.
"There are no fundamental problems with Italy’s banks," economy minister Giovanni Tria informed Reuters, "but we have some problems because of EU banking rules".
A week earlier, Italy’s deputy prime minister put it a little more forcefully: Matteo Salvini described the ECB’s demands for lenders to bolster their provisions for all bad loans by 2026 as a “new attack” on Italian banks that would “cause instability”.
The most suitable approach in strengthening balance sheets at this juncture is open to debate, but it would seem that a concerned market has been watching the sector’s travails for some time.
We note that there has been an 81% correlation over the past six months between the performance of Italy’s bank stock index and that of EUR/USD – the former having fallen 35% since this time last year.
Many Italian banks have sought to reassure that they can easily absorb the demands of the ECB’s Single Supervisory Mechanism.
It has to be said, however, that for all the mergers and fundraising measures implemented in Italy over the years, the sector’s problems have defied resolution. And fundamentally, it is difficult not to see this as a direct consequence of economic problems that are about to become more acute.
The stagnant, high unemployment, high debt Italian economy is firmly situated between a rock and hard place – ill placed to weather a global economic slowdown or the policy tightening that will ensue in its stead (the latter, a point raised implicitly by Fitch yesterday).
However, clearly, it is the former of these bleak scenarios that has come into focus.
Both the IMF and the Bank of Italy have slashed their Italian GDP growth forecast for this year to 0.6% - both broadly halving their projections from last November.
If such forecasts are prescient, then weaker growth can only compound the problems facing Italian banks. But weaker growth would also risk reigniting the EU budget debate should pressure on revenues begin to rise (as might be expected).
Giovanni Tria has played this down, noting that the government’s spending projections just happened to be based upon on growth forecasts of 0.6%. But economic momentum is set against the government and there are calls for the ECB to reconsider its plans.
Speaking to MNI on Tuesday, the League’s Massimo Garavaglia called for a new round of TLTROs “or other instruments, [it] doesn't matter … the ECB must put something in place, and fast. The biggest error of the ECB has been to terminate the assets purchase program at an untimely moment,” he added.
Intriguingly, investors are either relaxed with current developments or they are of the view that the ECB would be compelled to ride to the rescue should their implicit confidence prove to be misplaced.
Ten year BTP/Bund spreads have trended steadily lower since November’s highs and BNY Mellon iFlow data suggests that investors have been steady buyers of Italian debt since the turn of the year (see chart above).
Quite what a central bank makes of it all and just how it should respond to any concerns it may have when its assessments become a factor in the market’s thinking, remains to be seen.
Well, all eyes on Mario Draghi at 1330 GMT.