Saturday 19 January 2019

Italian bonds and banks hit in fallout from election

An activist wearing a mask of Forza Italia party leader Silvio Berlusconi poses in Rome
An activist wearing a mask of Forza Italia party leader Silvio Berlusconi poses in Rome

Saikat Chatterjee and Valentina Za

The euro has slipped, bond markets are down and shares have been rattled after Italian elections saw populist and Eurosceptic parties take more than 50pc of the vote.

Italian bonds and banking stocks took the brunt of the market sell-off.

Italy is the third biggest euro-area economy and by far the most indebted, with €2.3trn of government debt.

The prospect of power passing to a Eurosceptic coalition, which might boost spending in defiance of EU budget restrictions and row back on the previous government's market-friendly reforms, turned the spotlight on Italy's public debt pile, one of the world's biggest.

Its banks hold around €345bn of that debt and are considered a proxy for sovereign risk.

The euro edged up from the day's lows but remained weaker yesterday.

It came as the National Treasury Management Agency here said it was looking to raise €1bn worth of debt on Thursday in a dual bond auction, which will test the market.

Italy's election result and subsequent brief sell-off in currency and bond markets showed that political risks in the Eurozone were back on investors' radars, though recent strength in its economy has made investors more tolerant of uncertainty than last year.

John Moclair, head of customer group at Bank of Ireland, said the drag on the euro is likely to be short-lived, given the expected protracted nature of coalition talks. "So as negotiations get under way in the Italian capital, it is likely that market focus will return to developments in Brussels for clues on the future path of EURGBP," Mr Moclair added.

"Whilst Prime Minister May's speech last Friday was more conciliatory in tone, the lack of any concrete proposals to mitigate the major Brexit stumbling blocks will have further irked EU negotiators, and these tensions should continue to weigh on the pound in the near-term."

Read more: Signs that Irish and euro-area growth slowed

More worryingly from the euro's perspective, recent data showed that economic momentum has stalled in the Eurozone, indicating the single currency may be coming under some pressure. Italian bond yields risked spiralling out of control during the sovereign debt crisis of 2011-2012 and were only reined in by the European Central Bank's ultra-expansionary policies, which are being scaled down.

Boosted by Italy's fastest growth in seven years and expectations of a tighter monetary policy, Italy's banking index hit a near two-year high in February after state rescues last year removed the threat of a systemic crisis.

Any signs the recovery in Italy's economy will be undermined by political uncertainty could ripple through bond markets and weigh on the single currency, which hit a more than three-year high of $1.2556 in mid-February. (Reuters)

Irish Independent

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