An increase in Italy’s bond yield spread is a risk for domestic banks and is adding to tensions in the financial system, according to Cabinet Undersecretary Giancarlo Giorgetti.
“The spread is a risk for banks, which we can’t ignore,” the top official of coalition partner the League said in an interview with daily Il Messaggero published on Sunday. The situation requires “a serious and responsible approach from the government.”
The bond spread, the stock of public debt held by banks and the new European Union banking rules put tension on the Italian financial system, which “may generate the need to recapitalize some institutions that already have capital fragility,” Giorgetti said. He added that the country’s targeted budget deficit of 2.4 percent for next year is a “ceiling” and may not need to be used completely.
Italy’s banks are reeling from the impact on their capital levels of soaring government bond yields, which touched a five-year high. They’re also sitting on a 260 billion-euro ($299 billion) pile of non-performing loans — the biggest in the EU — left over from the last financial crisis and recession. The 10-year yield spread over Germany, a key barometer of risk in the nation, dropped from the highest level in more than five years after European Commissioner for economic affairs, Pierre Moscovici, said that the bloc wouldn’t interfere in the new government’s economic policies.
Moody’s Investors Service cut Italy’s credit rank by one step to Baa3, its lowest investment-grade rating, on concern the government’s budget will erode its fiscal strength and stall plans for structural reform.
“One notch downgrade was expected but not so early,” Credit Suisse Group AG analyst Carlo Tommaselli said in a note. A decision by Standard & Poor’s “is expected in one week. We would expect further pressure on banks.”