Many Italian banks are struggling to borrow on the private markets and want European Central Bank (ECB) help as they seek more than 55 billion euros (US$63 billion) in funding this year.
Even after removing the threat of major collapses by bailing out some of its lenders, Italy’s financial system is ill-equipped to support an economy at risk of slipping back into recession.
Italy’s banks are still dealing with the bad debt left by the last downturn and another would risk new loans turning sour.
Political uncertainty has meant a spike in borrowing costs for Italian banks since an anti-austerity government took power last year, with only heavyweights UniCredit SpA and Intesa Sanpaolo SpA able to raise unsecured debt.
Bailed-out Banca Monte dei Paschi di Siena SpA last week said that the ECB had warned it about the challenge of raising money this year, highlighting a pinch that was evident in the third quarter of last year, when the Bank of Italy said that 200 million euros more in senior debt expired than was issued.
“Net issuance levels are truly worrying,” Banor Capital’s head of fixed income Francesco Castelli said.
Italian banks rely on about 240 billion euros of ultracheap, longer-term funds borrowed from the ECB in 2016 and 2017, but that source of funding is now shut and without replacing so-called targeted longer-term refinancing operations (TLTRO) funds, Italian banks would see a drop in their net stable funding ratio (NSFR), a long-term liquidity measure monitored by regulators.
ECB policymakers have said they are considering a new type of multi-year loans to avoid a potential liquidity shock.
“We think there will be something akin to a new TLTRO offer that could help mitigate the increase in banks’ cost of funding,” Luca Manzoni, head of corporate at Banco BPM SpA, Italy’s third-largest bank, told a recent event.
A senior executive at another Italian bank said that this year looked difficult and he too expects the ECB to step in.
The ECB declined to comment on whether it would offer new long-term financing for Italian banks, whose shares plunged on Tuesday after a source said it would make them tackle their existing problem loans in full by a set date.
From June this year, Italian banks will be forced to gradually exclude from NSFR calculations about 140 billion euros in TLTRO funds that are due to be repaid in June next year.
The head of funding at a large Italian bank highlighted the NSFR as one of the big hurdles this year, along with requirements to issue debt that can be wiped out to cover future losses.
He expects more Italian banks to follow UniCredit and UBI Banca SpA, the only two lenders to have issued so-called “senior non preferred” (SNP) bonds, riskier, costlier paper than can be used to meet loss-absorbing debt targets.
UniCredit, which is subject to tighter rules due to its size, last week paid 360 basis points over the swap rate to place a three-year SNP bond in the US.
Although less than the 420 basis point premium it paid last month on a similar five-year bond, it is a far cry from the 70 basis points paid a year ago on its first SNP bond and bankers said the market respite was temporary.
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