It’s stress test week for European banks and six years on from the continent’s banking crisis, investors will be paying far more attention than usual to the results due out after markets close on Friday.
With 51 banks under the microscope, there’s one country that is set to bear the brunt of the stress-inducing stress tests: Italy.
In note to analysts, Goldman Sachs breaks down the numbers behind the Italian banking saga, where authorities in Brussels and Rome have been at loggerheads over a possible restructuring of the country’s ailing lenders , whose bad loans pile (NPLs, also known as soffrenze) stands at €210bn, writes Mehreen Khan.
Strikingly, Goldman analysts calculate that despite the significant burden the loans place on the domestic financial system, the NPL’s could all be wiped out with the equivalent of just nine months of bond purchases carried out by the European Central Bank.
With the ECB hoovering up €120bn per year of outstanding Italian government bonds as part of its quantitative easing scheme, “by the time QE is over –not sooner than end 2017, on our baseline scenario – around a fifth of Italy’s public debt will be sitting on the Bank of Italy’s balance sheet”, writes Francesco Garzarelli at Goldman.
Bringing the entire net stock of bad loans onto the government’s balance sheet would be equivalent to 9-months worth of BTP [Italian government bond] purchases by the ECB.
Italy, alongside France, stands out among Euro area countries as the one that has put the least amount of public funds into its banks, close to 0% of GDP. Consider that Germany has injected 8% of GDP, Spain 5% and the UK 7.1%.
And despite the considerable wrangling over the imposition of new “bail-in” laws requiring junior bondholders to take a hit from any possible restructuring, Goldman adds that Italy’s troubles are largely contained to its domestic economy.
“Italians have lent mostly to themselves: the country’s net international investment position is comparatively small”, says Mr Garzarelli.
But the words of relative comfort have provided no succour for Monte dei Paschi shares today, which have suffered their worst one day fall in three weeks, shedding 7.5 per cent.
Italy’s oldest and most troubled lender is set to be the biggest loser from Friday’s stress tests which will reveal the extent of its capital black hole as the government scrambles to find a private sector solution that would avoid triggering the “bail-in” framework.
Elsewhere in the country:
- Italy’s banking index is down 0.7 per cent
- Intesa Sanpaolo is down 1.6 per cent
- Unicredit, Italy’s biggest bank, is down 0.3 per cent
With four days for authorities to come up with a plan to inject capital into Monte dei Paschi, Goldman add that some form of “state intervention is both “likely and, at this late stage, desirable”.
Watch this space.
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