Not only Mps: the flare-up of BTP rates and the spread that returns above the danger threshold of the ECB puts investors at attention even in the face of UniCredit and Intesa SanPaolo:
“UniCredit, Intesa Dragged by 250-Bp Risks; ECB, Italy Budget Key”Bloomberg writes in an article. That is to say “UniCredit and Intesa weighted by the risk of 250 basis points ( danger threshold for the ECB); key factors are the ECB and the budget law“.
Bloomberg writes that “The fear of the sustainability of Italy’s sovereign debt is far from having disappeared for Italian banks, given that the risks of fragmentation, the BTP-Bund spread, have reached 250, despite the slightly positive signal from the elections: that of the least success collected by the League “ by Matteo Salvini.
The article sends a clear warning to Italy that is preparing to be captained by a #GovernmentMelons, emphasizing that “the new government’s budget law will be closely monitored, given that it is at stake there are $ 190 billion of funding (for Italy) from NextGenerationEU “.
Among other things, focusing on the health conditions of Italian banks, the news agency underlines that “the renewal of GACS guarantees will be crucial for NPLs (impaired loans – Non performing loans)” of institutes.
It should be noted that, yesterday, the rates on 10-year BTPs have touched the 5% thresholdleaping up to about 4.9%, in the wake of the unleashed sales that hit the global sovereign debt markets in general.
READ ALSO Banks and BTPs, with higher rates (re) focus on doom loops. And interest spending is set to rise
Intesa SanPaolo and UniCredit: YTD did worse than average
Bloomberg presents a table in which it highlights the trend of bank stocks Intesa SanPaolo and UniCredit, that in 2022 they did worse than the average value of European banks of 10-15%;
this happened due to the exposure of the two banks to Russia, but also due to the resignation of Mario Draghi and the uncertainty now about the fiscal policies that will be adopted by the Meloni government.
It is true, we read in the article, that “Italian banks recovered slightly on 26 September last, when the exit polls indicated the loss of consensus suffered in these political elections by the Lega di Matteo Salvini, suggesting lower pressure accordingly (from the League) on the new Eurosceptic government , aimed at deviating drastically ” the need to observe any budgetary constraints.
However, “Supporters of the slogan ‘Italy First’ personified by the upcoming Prime Minister Giorgia Meloni means that the risk that the new government is in conflict with the European Union remains “.
Bloomberg points out that, up to now, Giorgia Meloni has not expressed an aversion towards banks, factor that makes it “The probability of a rather limited tax on the sector in Italy, given the negligible growth estimated for the country’s GDP in 2023, lower than the annual rate of 1%”.
The real problem is represented by risks of fragmentation of the euro areaor rather from the trend of the BTP-Bund spread which, in rising beyond the threshold of 250 basis points, tested the highest value since 2019, almost 20 basis points higher than the one before the political elections.
The question is what will happen if the differential’s uptrend continues:
“If spreads remain higher than the 250 point threshold in a persistent way (with a tendency to rise further), the ECB could decide to deploy the shield ” anti-spread saves BTP which, among other things, announced on the day of the resignation of Mario Draghi on 21 July.
It’s about the tool TPI (Transmission Protection Instrument), described by the ECB as a tool that “Counteracts the unjustified and disordered market dynamics, which represent a serious threat to the transmission of monetary policy in all euro area countries”.
Doom loop, BTPs also distress other European banks
Ma BTPs and the doom loop problem do not worry Italian banks ‘only’.
As Bloomberg writes again, “the sustainability of Italy’s public debt it will be carefully monitored by Credit Agricole and CaixaBank, which are among the main holders of BTPs among non-Italian European banks ”.
In reality “Italy’s debt is concentrated in the hands of Italians, with foreign shareholdings (in BTP & Co) accounting for just over 30%, a percentage which in turn includes a share of just 5% in the hands of commercial banks ester. The aggregate value of BTPs held by non-Italian banks that Bloomberg amounts to more than 44 billion euros ”.
From the Bloomberg Intelligence data, it emerges in particular that they are Spanish banks, on average, hold more BTPs, compared to European banks, such as CaixaBank, Sabadell and Bankinter, all exposed to the Italian government debt with a percentage of their CET 1 higher than 30%.
Then there is Credit Agricole, which holds a significant amount of BTP, together with a 9% stake in Banco BPM’s share capital.
The article therefore indicates how, in the current context, “Italian banks could try to diversify their investments in sovereign bonds, focusing on government bonds other than BTPs, given the increase in capital risks that could derive from the adjustments to be made to the balance sheet “.
That said – and here’s the caveat it pertains Mps and the scourge of BTPs in the belly – some banks that have heavily invested in fair-valued Italian government bonds appear destined to be hit “.
“Approximately 90% of the sovereign debts present in the balance sheet of the MPS bank (reads Bloomberg article) it is made up of Italian debts, therefore of BTP & Co: of this amount more than half is valued at fair value, and while the total amount affects risk-weighted assets for approximately 17% “.
The risk of capital devaluation is therefore more than present.
Exposure is certainly much lower at other Italian banks, as in the case of Mediobanca – which saw the above ratio drop in June to the minimum value of Bper, which accounted for more than 90% of Italian government bonds at amortized costs, an element that makes these BTPs subject to adjustments only when they are reclassified or disinvested.
Banks and BTPs: crisis could explode at any moment
In short, Bloomberg concludes, “the jump in debt financing costs has created a grim situation for Italy, and a crisis could erupt at any moment. 10-year BTP rates they have surpassed the levels they travel to before the ECB’s June emergency meeting, and travel at values that were last seen before the ECB’s Governing Council launched its massive QE program ”.
Yet: “The trajectory of Italy’s debt-to-GDP ratio has passed, over the course of this year, from anticipating a slight decline over the next 20 years to rising steadily. Change – is pointed out –it was mainly caused by interest rate expectations (nell’area euro) taller”.
On the other hand, “higher non-risky bond rates are fueling concern over Italy’s solvency, by widening the spread between 10-year BTP rates and 10-year swap rates. The risk is that high inflation will remain and that traders will price an ECB forced to raise rates to levels closer to those expected in the United States or the United Kingdom “.