Italian banks being crushed despite EU deal

Shares of Italian banks continue to fall this morning despite Italy reaching a deal on debt with the European Commission this week.

By midday in Italy, the FTSE Italia All-Share Banks index had declined 5.3%. Trading of shares at a number of banks, including Banca Popolare di Miliano, UniCredit, Monte Paschi and Banca Popolare dell'Emilia Romagna, was halted after declining 5% or more.

The estimated €350 billion of bad debt in Italy’s banks could be proving too much for the EU to handle, with some banks losing nearly a quarter of their value.

Earlier this week, Italy’s treasury announced the government had agreed on a plan to help Italian banks offload non-performing loans, following a meeting between Italian Finance Minister Pier Carlo Padoan and the EUUnion competition commissioner Margrethe Vestager. The state will guarantee senior tranches of securitised bad debts, according to the treasury.

The agreement included pricing on guarantees set at market rates based on the credit-default-swap price of Italian issuers, with the same risk as secured notes, and would therefore not constitute state aid. According to the treasury, the cost of the guarantees was supposed to rise over time based on market prices and the extent of the recovery process.

Rating agency Fitch, in a report on the deal, says the success of the agreement would depend on how the bad debt is valued, adding that participation in the scheme is voluntary.

“This may limit take-up, and we also doubt whether the scheme will be sufficiently attractive to entice banks to make significant use of it,” the rating agency said.

“Our initial impression is that the mechanism’s ability to materially improve asset quality in the Italian banking sector is limited.”

Talks between the banks and the EU had been continuing for a year with little progress but, as with other countries around the world in the first few weeks of the year, a dramatic fall of Italian bank share prices in January pushed the negotiators towards making a deal. The most controversial aspect of the talks was whether to allow state aid to support banks.

Since late October, shares in UniCredit SpA, once Italy’s largest bank by market capitalisation, have declined by more than 40%, plunging over 6% Thursday alone.

There is now a sizable gap between Italy and the other largest eurozone economies: Over 16% of debt instruments in Italy were classified as nonperforming last year. That figure is  6% in Spain and 2% in Germany, according to the Wall Street Journal.