Italy is considering injecting capital into some lenders after the U.K.’s vote to leave the European Union sparked a selloff among banks already hurt by investor concerns tied to their bad loans, according to people with knowledge of the discussions.
The government is weighing measures that may add as much as 40 billion euros ($44 billion), said one person, asking not to be identified because the talks are private. The government may support lenders by providing capital or pledging guarantees, said the person. The amount is still under discussion and no final decision has been taken, according to the people.
Italy’s government is struggling to stabilize a financial system, hurt by 360 billion euros of non-performing loans, sluggish economic growth and record-low interest rates after an earlier attempt to set up a bad bank with public funds met with resistance from the EU. The country’s banks were among the biggest decliners on Friday after the outcome of the British referendum, with some of the largest companies losing more than 20 percent of their value.
“The Italian banking sector’s worries are far from resolved,” said Jan von Gerich, a strategist at Nordea Bank AB in Helsinki. “The outlook for Italian banks was clouded even before Brexit and the new worries Brexit has created for the banking sector in general further darken the outlook for Italian banks.”
Italy’s Il Fatto Quotidiano reported the deliberations earlier on Monday.
Lenders extended declines on Monday, with UniCredit SpA, Italy’s biggest bank, down 8.2 percent at 12:11 p.m., and Intesa Sanpaolo SpA dropping 6.8 percent. The 39-member Bloomberg Europe Banks and Financial Services Index decreased 6.4 percent.
Government and Bank of Italy representatives met over the weekend to discuss proposals, while also holding informal meetings with the European Commission, the people said. Italian authorities are monitoring markets and a decision on possible measures to support banks will be taken in the next few days, they said.
The injection could be financed through government debt issuance, Il Fatto Quotidiano reported, citing undisclosed sources.
Governments are able to provide funds directly to banks under exceptional circumstances of systemic stress such as sparked by Brexit, without breaching state-aid rules.
"Tactically this is the time to push EU partners to approve their plans, which would otherwise probably meet with many objections,” said Marc Ostwald, a strategist at ADM Investor Services International Ltd. in London. It’s unlikely to ease the “already colossal task of bank balance-sheet resolution.”
With Italy seeking to rein in its debt burden, the euro region’s second biggest as a percentage of gross domestic product, any additional resources aimed at ensuring the stability of its banking system might limit the country’s spending elsewhere as the economy struggles to recover from a recession.
Italy and the commission, the EU’s executive arm, agreed in January on a plan to help banks offload bad debts, ending months of negotiations over ways to ease the burden on the nation’s lenders, while staying on the right side of the bloc’s state-aid rules. The deal effectively watered down an original Italian project to create a bad-bank vehicle amid EU concerns that disposals could constitute illegal state aid.
Prime Minister Matteo Renzi has been pushing a package of reforms to modernize Italy and spur growth since he took office in February 2014. He has pressed cooperative lenders to become joint-stock companies, encouraging mergers to help reduce duplication and boost profitability and pushed the creation of Atlante, the government-orchestrated banking fund to help the country’s lenders build capital and reduce bad debt.
So far, the measures have failed to reassure investors, with UniCredit down about 62 percent this year. Intesa has lost 45 percent of its value in that period, while Banca Monte dei Paschi di Siena SpA decreased 64 percent.
“In Italy, a 10 percent fall in the stock market following the Brexit vote clearly signals the country’s vulnerability to a full-blown banking crisis,” billionaire George Soros said in an opinion piece for Project Syndicate published last week.
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