Italian banks led sharp declines across the wider European financial sector on Monday, on concern about the risks to the financial system that could follow next weekend’s reform referendum.
Italians will vote on reforming the country’s constitution on Sunday, and centre-left prime minister Matteo Renzi has vowed to step down if the referendum is rejected, a result suggested by current polls
The prospect of political turmoil in the eurozone’s third-largest economy threatens plans to clean up Italy’s oldest bank Monte dei Paschi. Banks were at the forefront of selling from Milan, to Paris and Frankfurt and London.
All the constituents in the Euro Stoxx banking sub-index were in the red sparked by contagion fears for the wider sector, as it fell 1.4 per cent to a two-month low, outpacing a decline of 0.7 per cent on the main Euro Stoxx 600 index.
Milan’s FTSE MIB fell 1.4 per cent overall, a sharper decline than the FTSE 100’s 0.7 per cent fall in London and a 0.9 per cent loss for Frankfurt’s Xetra Dax.
“We see a non-trivial risk that a new, prolonged period of ineffectual governments leads to systemic instability in the medium term,” warned analysts from Deutsche Bank.
“A muddle-through scenario means a very low likelihood of significant reforms; in our view Italy’s economy will continue to perform poorly in both absolute and relative terms,” said Marco Stringa, strategist at Deutsche.
Unicredit — Italy’s most systemically important bank — was the biggest single faller, with its shares down 4 per cent, while Banco Popolare, Banca Popolare di Milano and Banco Emilia fell more than 3 per cent.
Senior bankers have told the FT they fear Mr Renzi’s resignation would deter private investors from pumping fresh funds to recapitalise lenders, leading to concerns they will need to be put under a new EU “resolution” mechanism that would force losses on creditors.
The reaction was less severe on capital markets. Italian subordinated bank bonds, the most risky exposure to the sector after equities, fell but many are still trading far above levels they touched earlier this year. A €1bn Unicredit subordinated bond was trading at 85 cents on the euro. In February it was trading at 71 cents. Similarly, an Intesa subordinated bond is at 94 cents, compared with February when it was below 86.
A “No” vote “would likely usher in a period of increased political uncertainty in Italy and would represent a major setback for economic reform efforts”, noted Elsa Lignos at RBC Capital Markets
“Italy continues to be a long-term risk for the euro area, but that is a two-year rather than a two-month trade,” said Ms Lignos.
Nonetheless, there were voices of support for the sector.
James Sym, an investor at Schroders, said of the selling: “We just feel it’s getting overdone. We’ve got to a level in the banking system where I think that’s broadly priced in.”
He added that the “big question” is the situation with non-performing loans held by Italian banks, and the discount rate used to value them.
“I sort of take a view that just as in 2012, 2013, there was a point where the market decided Spain had done enough provisioning. At some point we’re going to get to that point in Italy. It’s always the darkness before the dawn,” he added.