by Eric J. Lyman
ROME, Aug. 30 (Xinhua) -- The Italian banking system is again worrying investors, with high exposure to Italian government debt and the prospect that some may need to raise new cash on capital markets, pushing stock prices lower.
Italy has the third-largest economy in the euro zone, meaning the health of its banking system has big implications for the European Union as a whole.
Italy's banking sector has long been one of the most troubled in Europe, with unusually high levels of non-performing loans -- reaching a high of 360 billion euros (413 billion U.S. dollars), or about 18 percent of the total in 2015.
Since 2016, banks have worked to acknowledge the bad debt and take it off their balance sheets. Even Monte dei Paschi di Siena, the country's most troubled bank, cut costs and avoided bankruptcy with a 4-billion-euro (4.6-billion-U.S. dollar) cash infusion from the Italian state. Today, bad loans account for just 60 billion euros (68 billion U.S. dollars) for the sector as a whole. Ratings agencies gave the sector their approval.
But now new troubles are appearing on the horizon. International confidence in the new Italian government under Prime Minister Giuseppe Conte is falling, amid fears it will implement policies seen as increasing spending and reducing tax revenue. Since the start of the year, the spread -- the difference between the yields on government bonds from different countries -- between Italy and Germany has nearly tripled, from 100 points to 285 points.
That is a problem for Italian banks, according to Marcello Messori, a political economist with Rome's LUISS University, because as yields on bonds rise they erode the value of bonds bought at the lower interest rate.
"Italian banks are so heavily invested in government bonds that this increase in yields is having an impact on their balance sheet," Messori told Xinhua. "In 2016 the percentage of bank assets invested in government bonds reached a peak before starting to fall. Now, with a lack of other safe investment options it is climbing again."
There is also a fear that if yields climb too high the government could default on bond payments, hurting balance sheets even more, though Messori said that is still very unlikely.
"If that happened, it would mean so many bad things took place that there would be many other problems than the financial position of certain banks," the professor said.
Another problem for the banks, according to Mario Seminario, an economic analyst and investment manager, comes from the relative attraction of Italian banks compared to their peers in Germany, France, Spain and other big euro-zone countries.
"With this weakness for Italian banks, it is possible they will have to issue new shares in order to raise capital and that would reduce the value of the shares any investor was already holding," Seminario said in an interview. "That makes banks in other countries more attractive in comparison."
In that context, shares in every national Italian bank have lost value since June 1, when the Conte government was installed.
Seminario said the next big milestone will come Aug. 31, when two major ratings companies are expected to issue their verdict on the health of the banking system.
"If the banks see a significant downgrade at the end of the month, that would definitely be a market-moving event," Seminario said.
