Bloomberg News

Italian Bank Outlook Darkens on ‘Stress,’ Lower State Support

July 01, 2011

July 1 (Bloomberg) -- The outlook for creditors of Italy’s biggest banks is darkening as concern the sovereign may be downgraded combines with expectations of lower state support and a “stressed environment,” according to Moody’s Capital Markets Research Group.

Credit grades implied by the cost of insuring the debt of the lenders using credit-default swaps are six to eight levels below their formal ratings, according to analysts Lisa Hintz and Ervis Deda in New York. The gap is similar to that of Irish and Portuguese banks as investors sought to factor in the extent of their problems, the analysts said.

“These negative gaps are certainly at outlier status,” the analysts wrote in a report dated June 30. “Regardless of whether a similar case exists here on a fundamental basis, the market seems to be discounting, or hedging, tail risk in the same way.”

Italy, whose $2.3 trillion of debt is the largest in Europe, has so far avoided being sucked into the financial crises that have engulfed Greece, Ireland and Portugal. Lawmakers are seeking to balance the budget by 2014 and plan to push deficit-cutting measures worth 47 billion euros ($68 billion) though Parliament later this year.

Moody’s Investors Service, the ratings firm linked to Moody’s CMRG, said in May it may cut UniCredit SpA, the biggest lender, and downgraded Intesa Sanpaolo SpA, the second largest, before putting the Italian sovereign under review for a downgrade on June 17. The firm is re-assessing its bank ratings to take account of the diminishing willingness and ability of states to support banks that get into trouble.

The stock prices of Italy’s five biggest domestic banks slid an average 27 percent this year and 48 percent from the peaks in February, according to the analysts. Profitability is also “under pressure,” and the environment is “not conducive to a rapid improvement in profits,” Moody’s CMRG said.

That means Italian banks will find it harder to build capital to meet the new requirements set by international banking regulators, according to Moody’s CMRG.

--Editors: Michael Shanahan, Cecile Gutscher

To contact the reporter on this story: John Glover in London at

To contact the editor responsible for this story: Paul Armstrong at

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