Sov­er­eign debt risk raises pres­sure on Ital­ian banks

The Pak Banker - - Company& -

MI­LAN: Euro zone sov­er­eign debt con­cerns may soon put added pres­sure on the cap­i­tal ad­e­quacy ra­tios of Ital­ian banks even though an­a­lysts say it's too early to raise the red flag on the coun­try's fi­nan­cial sys­tem.

Af­ter an 85 bil­lion-euro bailout for Ire­land failed to re­as­sure mar­kets on Sun­day at­ten­tion has shifted to look­ing at which coun­try might be next to need help. And af­ter Por­tu­gal and Spain, some in­vestors are now rais­ing con­cerns that Italy may also be swept up in the cri­sis.

Italy's ef­fec­tive 10-year bor­row­ing cost on Tues­day rose to 4.75 per­cent, a year high, and the spread over Ger­man bunds rose to a euro life-time high.

The eu­ro­zone cri­sis else­where has shown just how in­ter­twined the fi­nanc­ing prob­lems of banks and gov­ern­ments are.

Wor­ries have now turned to Italy where the banks are look­ing rel­a­tively un­der­cap­i­tal­ized in the con­text of a no­to­ri­ously un­sta­ble po­lit­i­cal sys­tem, pub­lic debt stand­ing at nearly 120 per­cent of do­mes­tic out­put and the need to re­fi­nance 280 bil­lion eu­ros of key govern­ment debt next year.

Ital­ian len­ders, tra­di­tion­ally cau­tious and able to rely on re­tail de­posits for fund­ing, fared bet­ter than many Euro­pean peers in the fi­nan­cial cri­sis as they avoided risky sub­prime bets and did not need emer­gency govern­ment fund­ing.

But de­spite their com­par­a­tive strength, the threat of risk to Italy's sov­er­eign debt has had an ob­vi­ous im­pact on Ital­ian banks and in­sur­ers, who are ma­jor hold­ers of do­mes­tic bonds.

"The

Ital­ian banks are safer and there's much less earn­ings risk as they are bet­ter funded by cus­tomer de­posits," said An­drew Lim, an­a­lyst at Ma­trix in London.

"But if Italy as a sov­er­eign finds it­self in the same sticky sit­u­a­tion as Ire­land you have the worry about de­fault risk."

As a re­sult cap­i­tal ad­e­quacy ra­tios of around 8 per­cent of as­sets at ma­jor Ital­ian banks now look in­ad­e­quate com­pared with some of their Euro­pean peers and es­pe­cially those in Switzer­land, Bri­tain and the Nordic re­gion.

"Reg­u­la­tors are clearly aim­ing for an in­crease of cap­i­tal ra­tios, which is also the main ob­jec­tive of Basel III, and will con­tinue to pres­sure banks in this di­rec­tion," said Gi­ada Giani, an an­a­lyst with Citi. "That was, for in­stance, the so­lu­tion found for Ire­land, an in­jec­tion of funds to boost ra­tios. -PB News

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