The chairmen of Italy’s two biggest banks played down risks that a landslide victory by a right-wing coalition will spark market turmoil.
(Bloomberg) — The chairmen of Italy’s two biggest banks played down risks that a landslide victory by a right-wing coalition will spark market turmoil.
“It seems to me that a sense of responsibility from political parties of both sides is spreading, and therefore whoever wins will take into account the fragility of public finances in addressing Italy’s resources,” Pier Carlo Padoan, chairman of UniCredit SpA, said in an interview late Friday at the Ambrosetti Forum in Cernobbio, Italy.
His Intesa Sanpaolo SpA counterpart, Gian Maria Gros-Pietro, told Bloomberg News that election concerns need to be “downplayed,” adding that the bank will ask whoever is elected to implement the European Union’s recovery plan. Both executives ruled out that the outcome of the vote may add pressure on Italian lenders, which are already facing a fraught economic environment and geopolitical instability.
Italy is holding elections on Sept. 25 after the collapse of Mario Draghi’s ruling alliance. A right-wing coalition — led by Giorgia Meloni’s Brothers of Italy and including Matteo Salvini’s League party and former premier Silvio Berlusconi’s Forza Italia — is leading in the polls. Some analysts have warned that campaign promises of deficit spending and nationalist policies might unsettle markets.
“The adverse scenario for markets could be if the right-wing coalition gets more than two thirds of the votes as this would allow for a high degree of freedom, including changes to the constitution,” analysts at UniCredit said in a note Sept. 2. Still, they highlighted volatility spikes in the run-up to elections have significantly diminished as the right-wing coalition has pledged to stick with European guidelines.
Meloni, who may become Italy’s first woman premier, has vowed to maintain the course set by Draghi on support for Ukraine and fiscal discipline. In an attempt to shore up her credibility on public finances, she even pushed back against Salvini’s call for more deficit spending to stimulate the economy.
Italian banks are considered vulnerable to market tensions and rising government bond yields because of their exposure to the country’s debt.
“Given the uncertainties generated by the September elections, and the perception of an economy more exposed to external shocks, we believe that Italian banks will struggle to outperform EU peers in the near future,” Giovanni Razzoli, an analyst at Deutsche Bank AG, said.
What Bloomberg Analysts Say…
“Intesa and UniCredit’s five-year senior CDS spreads may keep tracking Italy sovereign CDS wider, given the many risks ahead… Spreads may go wider still — political risk In Italy is growing, the country’s Russian gas dependency is high and ECB bond buying has ended.”
–Jeroen Julius and Huw Worthington. For the full report, click here
The FTSE Italia All-Share Banks Index is down 23% this year, underperforming the Stoxx 600 Banks Index, which has dropped 13%. The extra yield investors demand to hold Italian 10-year notes over German debt is 31 basis points higher since July 19 — the day before Draghi announced his resignation.
The appointment of market-friendly, “highly-regarded” ministers, as previously indicated by Meloni, will change the risk perception for Italy, according to Francesco Castelli, head of fixed income at Banor Capital. “The Treasury is likely to continue his current policies.”
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