Italy’s investment bankers are agog. In a country still racked by economic weakness and stubborn structural rigidities, dealmakers are already enjoying levels of business on a par with pre-2007 boom times. The activity was sparked by a flurry of privatisations, corporate rationalisations and inward investment from China, the Middle East and beyond.

Now the bankers are looking forward to another macro-driver of mergers and acquisitions. In two weeks’ time the long-awaited results of a vast health check on the eurozone’s banks by the European Central Bank will be made public – and Italy’s lenders are widely expected to fare among the worst.

Some have predicted that up to a third of the 15 Italian banks undergoing a combined asset quality review and stress test could fail, notwithstanding a clutch of pre-emptive capital raising. (Only Germany is expected to do as badly, with many of its 24 lenders in the test drawn from the troubled publicly owned Landesbank sector.)

Test failures will heighten the rationale for takeovers. Italy’s at-risk list is largely made up of popolari, co-operatively owned banks, a number of which are burdened by large bad debts, weak capital levels and tortuous governance that give vast powers to the unions.

Also widely expected to fail is Monte dei Paschi di Siena, Italy’s third largest lender, now chaired by Alessandro Profumo, a veteran dealmaker and former boss of Italian number one, UniCredit.

Basic logic – and Mr Profumo’s heart – might suggest he should orchestrate a mass merger and rationalise Italy’s notoriously overbanked market for good. It would be a fitting career denouement for the 57-year-old who made his name with a series of acquisitions in eastern Europe and Germany when at UniCredit. But there are flaws in such an idea – MPS would be trying to lead a process from a position of weakness; and the popolari’s governance and legal status would hamper combinations beyond their own kith and kin.

Any real-life consolidation looks set to be messier. Bankers reckon two of the largest and strongest co-operatives, UBI and Banca Popolare di Milano, may end up leading separate constellations of popolari. The most likely fate for MPS, meanwhile, could be a takeover by a foreign buyer – if anyone will have them.

As with many Italian banks, prospective acquirers will be wary of the quality of MPS’s loan book – though the ECB exercise should calm nerves on that count. Then there is the macroeconomic outlook for Italy – last week the International Monetary Fund downgraded its forecasts, predicting that gross domestic product will shrink by a further 0.2 per cent this year, rather than grow by 0.3 per cent as previously estimated.

There is also a dearth of potential buyers – Intesa Sanpaolo and UniCredit, Italy’s “big two”, both swear blind they would not touch MPS or the popolari. And the strongest potential foreign bidders are hamstrung – BNP Paribas, which already owns a chunky Italian lender, BNL, is in shock after an $8.9bn fine for sanctions breaches; and Santander has been through a significant change of management.

The severity of the results in the ECB exercise will dictate the pace and manner of what happens to the structure of Italian banks. Some fear an excessively tough outcome could create obvious problems for the Italian government and its energetic prime minister Matteo Renzi. On top of all the other headaches he has to contend with – notably around ongoing labour market reform – he could do without the ECB catalysing a full-blown banking crisis.

But the opposite extreme – the kind of damp squib ECB test result that some now believe is likely – could be worse in the long term for Italy.

With any luck, the process will strike a balance and overcome the challenges of mixing and matching acquirer and acquiree. A more robust “big four”, in place of the current two big banks – buttressed by prospective legal reforms to speed up debt recovery and curtail zombie lending – would aid Mr Renzi’s efforts to engineer an economic turnround.

Cross-border deals would also serve the ECB’s broader purpose of promoting a genuine single market in European financial services, a key longer-term aspiration that is easily forgotten in the fog of war.

Any dealmaking would trigger some investment banker bonuses along the way of course. But even a financially disaffected post-crisis populace might forgive the bankers if the process really helped ease Italy’s current woes.

patrick.jenkins@ft.com

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