Italian Markets Shrug Off Banking Morass And Local Election Results

The US dollar is mostly slightly firmer as North American dealers return to their posts. Ideas that the UK Tories are getting close to a deal with the DUP appears to be lending sterling a modicum of support, as it tries to extend its uptrend into a fourth session. The Japanese yen is the weakest of the majors, rising equities, and yields, spurs the dollar to re-challenge last week’s high near JPY111.80.  

The way in which Italy has decided, with the EC’s permission, to close the two regional bank at a not insignificant cost to taxpayers was widely criticized in the media and by analysts. Italy’s second-largest bank, Intesa got a sweetheart deal. It is able to take over the failed banks assets, but not liabilities as had been the case recently in Spain. It was also given around 400 mln in guarantees in case some of the asset sour.It was granted about 4.8 bln euros to maintain its capital ratios. Senior bondholders and depositors were kept whole.

It is important to recognize that this is not a case of Italy ignoring the new rules about the resolution of troubled banks. Italy exploited a loophole, and the EC approved. Italian officials argued that state aid was necessary to avoid economic disturbances in Veneto. The fact that the banks were not systemically significant also allowed greater flexibility.  

The markets have initially responded favorably. Italy’s 10-year government bond yield is off three basis points today, which is the most in Europe outside of Greece, which was upgraded by Moody’s before the weekend. Despite the lack of debt relief from the official creditors, Greece is still exploring a return to the capital markets. That is essential if a fourth aid package when the current one ends in a year is to be avoided.  

Italian equities have rallied, and the FTSE-Milan Index is up 1.4% to the lead the major bourses higher. The Dow Jones Stoxx 600 is up half as much, led by consumer staples and financials. The bank shares sub-index is up 1.3%, to snap a four-day drop. Italy’s All-Share Bank Index is up 3.3%, the most since Macron’s first round victory in the French presidential election in late April.