Wishful thinking may not be enough.
The financial markets have been exceedingly calm in Italy of late. At the end of October the government was able to sell 2.5 billion of 10-year debt at auction at a yield of 1.86%, the lowest since last December – an incredible feat for a country that four months ago witnessed a major bank bailout and two bank resolutions, and that has so much public debt that it spends 70 billion a year to service it, the world’s third-highest.
And there’s the ECB’s recent decision to slash its bond buying from roughly 60 billion a month to 30 billion as of Jan 1, 2018. Then there’s the over 432 billion of Target 2 debt the government owes the ECB, the growing likelihood of political instability as elections approach in 2018, the recent referendums for greater fiscal and political autonomy in Lombardy and Veneto and serious unresolved issues in the banking sector.
Monte dei Paschi di Siena may still be alive as a bank, but it’s not out of the woods. Last week its stock resumed trading after ten months of being suspended from Italy’s benchmark index, the FTSE MBE. Shares opened on Wednesday at 4.10, then rose 28% to 5.26. But it didn’t stick. On Friday, shares closed at 4.58.
It’s a far cry from the 6.49 a share the Italian government paid in August when it injected 3.85 billion into the bank to keep it alive. It spent another 1.5 billion shielding some of the bank’s junior bondholders, whose debt was converted into equity. As part of the rescue, the Tuscan bank was forced to present a plan to cut 5,500 jobs and close 600 branches until 2021, in addition to transferring 28,600 million euros in unproductive loans and divesting non-strategic assets. Investors clearly have their doubts.
This post was published at Wolf Street on Nov 5, 2017.