Double slap from Moody’s and from Germany to Italian banks and BTPs.
In the aftermath of the good news for Italy’s GDP, Moody’s announced the decision to leave the outlook for Italian banks at “negative”, despite the roundup of positive news that arrived with the publication of the quarterly reports.
In a note, the Moody’s agency specified that the view on Italian banks remains as it is, ie negative: the outlook on German banks has instead been revised upwards, going from “negative” to “stable”. Stable outlook also for banks in other countries, including France, Spain, Holland, UK, Sweden, Switzerland.
Also today, the hawk of the ECB Joachim Nagel, president of the Bundesbank and one of the most hawkish exponents of the Governing Council of the ECB, put the ‘boss’ Christine Lagarde and the entire Eurotower to attention. On the same day that the relative numbers were published, the number one of the German Central Bank invited the ECB to be more stubborn about inflation, also hoping and predicting an acceleration of the antithesis of Quantitative easing, or QT -Quantitative Tightening.
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ECB and rates: the German Nagel (Bundesbank) raises the threat against spreads and BTPs
The sell-offs of government bonds in the area that will become reality this month, Nagel warned, “could rise to 20 billion euros” a month, therefore higher than the 15 billion euro cut that had been announced by the number one from the European Central Bank, Christine Lagarde.
The German banker admitted that he is feeling even more comfortable looking at the markets, which have effectively increased their hawkish bets on Eurozone rates.
“I feel much calmer looking at the perception that the market has regarding the role of the ECB”.
In fact, the market is pricing in a rate hike of 50 basis points at the next meeting of the Governing Council of the ECB on 16 March, as repeatedly reiterated by the Eurotower exponents themselves several times, with a probability of 64%. The remaining percentage is betting on a monetary tightening of as much as 75 basis points, given the intention, confirmed by Christine Lagarde just a few days ago, to do everything possible to dampen the growth of inflation in the Eurozone.
Among other things, a few hours ago Goldman Sachs’ outlook on rates in the euro area arrived.
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Returning to the words of Joachim Nagel, the hope for a more aggressive QT, already indicated a few months ago, at a time when the Quantitative Tightening had not yet been announced, risks putting further pressure on the BTPs and other government bonds of the euro area, which has already been subject to a sell-off in the last few hours.
A Reuters article referred to two-year German Bund yields, known to be highly sensitive to changes in rate hike expectations, which soared to 3.209%, the highest value since October 2008, i.e. almost 15 years. Yields on 10-year Bunds also advanced up to +8 basis points to 2.711%, testing the highest value since July 2011, again the highest in more than ten years. There is also great anxiety about BTPs: in this case, two-year BTP rates shot up to a record high since August 2012, up to 3.737%, and then slowed down – again according to what was reported by Reuters – to around 3.731%.
The 10-year BTP rates rose up to +8 basis points, to 4.547%, not far from the record of the last two months tested in yesterday’s session.
And certainly the prospect of what Joachim Nagel said, ie the risk that the ECB could be even faster in disinvesting BTPs and other sovereign debt securities in the euro area, further frightens those betting on government bonds made in the Eurozone.
In this regard, the phrase that Nagel uttered not long ago against the ECB’s BTP-saving anti-spread shield should be recalled.
ECB and anti-spread shield save Btp, Germany’s slap to Italy. Nagel’s Bundesbank holds back, prefers OMT-Mes
Watch out today not only for BTPs and the risk of tensions on Italian debt that comes with Nagel’s words, but also for Italian banks.
Yesterday Moody’s announced that it has revised upwards its estimates for Italy’s 2023 GDP, from the previously expected decline of 1.4% to growth of +0.3%, following the 2022 expansion of +3.9%.
Despite the minus sign foiled by the Italian economy, the rating agency issued a note, which showed that, however, the prospects for Italian banks have not improved.
Moody’s justified the decision with concerns about the credit quality of Italian banks and, also, for the increase in funding costs.
The rating agency fears that in Italy credit institutions will face a rise in NPLs, impaired loans, as “the rise in prices (therefore the growth in inflation) will damage the creditworthiness of households and small companies”.
Of course, Italian banks will continue to benefit from the positive effects on their NII (interest margins) of interest rates
Moody’s wrote that “higher interest rates will increase banks’ interest income and profitability, outweighing loan-loss provisions and higher operating costs.”
However, another factor will also weigh on Italian banks, namely “the repayment of ultra-subsidized loans that had been granted by the ECB to the banks” of the Eurozone under the TLTRO programme. These repayments will put upward pressure on the burdens that institutions will have to bear.
under the liquidity support program for targeted longer-term refinancing operations (LTTRO) of the European Central Bank will add to the cost burden of Italian banks”.
However, a positive note is represented by the fact that Moody’s has confirmed its confidence in the capital ratios of Italian banks which, in its view, “will remain”.
What is certain is that the outlook of Italian banks remains negative, while that of German banks has improved. Referring to the latter, the agency mentioned the positive effect that the significant improvement in the outlook on the economy will have on the quality of assets and the profitability of institutions. Mention in particular some factors that will assist German banks: the fiscal stimulus launched by Berlin, the solidity of the labor market made in Germany and more flexible companies thanks to the diversification of energy sources.