Macroscope | Italy is nearing its Lehman moment
Officials are urgently seeking a bailout solution as stress in the Italian banking system worsens by the day
The resilience of financial markets knows no bounds.
Barely three weeks after British voters decided to sever their country’s 43-year membership of the European Union (EU), sending shockwaves through global markets and prompting renewed fears about the fragmentation of Europe’s single currency area, investors are already regaining their appetite for risk.
The big question is whether any deal will allay market concerns about Italy’s banks
On Wednesday, the pound, which has borne the brunt of fears about the consequences of a British exit from the EU, continued its recent rally after Theresa May replaced David Cameron as the UK’s premier earlier than expected, allaying some of the concerns about Britain’s political crisis.
US equity markets have bounced back, with the benchmark S&P 500 index now standing at a record high, buoyed by signs of positive earnings from US companies and more economic stimulus measures, notably in Japan following premier Shinzo Abe’s convincing victory in Sunday’s upper house elections.
Yet beneath the surface of improving sentiment, another, potentially more damaging, crisis is brewing in Italy.
Since the day of the UK referendum on June 23, the shares of Italian banks have fallen dramatically. The stock of Banca Monte dei Paschi di Siena (MPS), the world’s oldest bank and Italy’s most vulnerable lender, has dropped by a staggering 43 per cent, bringing its decline over the past year to more than 80 per cent. Even UniCredit, Italy’s largest bank by assets and the only one of systemic importance, has seen its share price fall more than 20 per cent since the Brexit vote.
Investor sentiment towards Italy’s banking sector has deteriorated to levels last seen at the height of the eurozone crisis at the end of 2011. A gauge of systemic stress published by the European Central Bank (ECB), known as the Composite Indicator of Systemic Stress, has shot up over the past two months and is currently at its highest level since Greece’s debt crisis in the spring of 2012.