MILAN (Reuters Breakingviews) - May 27, 2019. It’s 6:25 a.m. on the U.S. East Coast. Mike P., a portfolio manager at Boston’s OMG Capital, messages a dealer contact in Milan via WhatsApp after checking the markets on his Eikon app.
Mike P. – Hey, what is going on in Italy? The 10-year BTP-Bund spread heading for 350!! It was below 300 when I checked on Friday. UniCredit shares are below 10 euros. Intesa below 2 euros??
Marco – Don’t you know? Matteo Salvini almost scored a home run in the European parliament elections.
Mike – You mean the anti-immigration guy who runs Italy’s League?
Marco – Yep. He got 39 percent of Italian votes, more than twice than in the March 2018 ballot.
Mike – NFW!
Marco - If this was a national vote, he could probably control both chambers of parliament. We think he is going to seek an early vote to break away from his partners in the government, the 5-Star Movement.
Mike – Is this good or bad? I’m still long Italian banks …
Marco – Well, our banks hold collectively like 320 billion euros of sovereign Italian bonds. For every 100 basis points in the spread, a listed Italian bank can lose 30 to 40 basis points of core capital. That means arrivederci dividends.
Mike – Can they handle that?
Marco – Big players like Intesa and UniCredit are in better shape than in 2011, when we had the last big sovereign debt scare. They have raised enough capital to sustain a severe shock, as the last stress test shows. And they sold lots of dud loans. But smaller ones, like Carige, are not out of the woods yet.
Mike – So I should calm down?
Marco – Not yet. There are other issues. The cost of refinancing is becoming prohibitive. UniCredit had to pay 420 bps of premium to issue a senior note in November. Before the League and 5-Star formed a government, the bank paid just 70 bps more.
Mike – Should I sell then?
Marco – You need to watch Salvini. If he wins an early election hands down, he may tone down the EU-bashing and focus on pro-business reforms liked by his entrepreneurial base. But he still surrounds himself with eurosceptics like EU Affairs Minister Paolo Savona and MP Claudio Borghi. If he sticks with this crowd, the Quitaly risk will stay.
Mike - You’re killing me here, Marco. Should I just bite the bullet, buy Deutsche Bank stock and get out of Italy?
Mike – Marco, you still there? Marco?.......
- This is a Breakingviews prediction for 2019. To see more of our predictions, click reut.rs/2R6H5pG
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.