The general agreement reached between the Italian government and the European Commission, after six months of negotiations, concerning the restructuring plan for Monte dei Paschi di Siena is an important sign for the Siena-based bank’s affairs. It has taken entirely too long and several months yet will be needed to close the case. Yet on this subject the market is relatively unconcerned, as it looks to the banks of the Veneto region with greater interest. The hope is that ultimately a solution will be found that is similar to that identified for Monte dei Paschi, and that for the two struggling banks, the lengthy negotiations between European institutions and the Italian executive branch do not have even more deleterious effects. The fact that the two Veneto-based banks’ senior bonds are priced at around 75 euro means that investors are not ruling out a return of the systemic risk associated with the bail-in, which would result in a significant increase in the cost of funding, and not just for the two banks. For all that it does not seem a likely outcome, the market continues to regard it as a possible scenario.
In the meanwhile, the upwards revision of the growth estimates for Italian GDP to 1.2% in the first quarter, the strongest figure since 2010, is instilling a bit of optimism. Yet time will tell whether and to what extent the pace of the economy will be conditioned by the new phase of political uncertainty that will be born of the nascent agreement concerning the electoral law and the resulting early elections. On the one hand, as elections draw near, one might expect greater volatility on the Italian market. On the other, in the autumn the spread will still be essentially protected from violent fluctuations, due to the full support of the European Central Bank, within the framework of its quantitative easing plan. However, Italy has other problems: it needs to form a government capable of responding decisively to the structural problems that are weighing the country down.
For the time being, investors remain focused on the subject of reflation. The first months in office of the new U.S. administration have so far disappointed expectations tied to the ambitious turnaround plan based on tax stimulus measures announced during the election campaign. There can be no doubt that expectations of faster growth and inflation have been moderated since the beginning of the year. Yet this is a situation that is destined to go on for years. In any event, I do not believe that we will see a return to the slack, resigned tone seen in last July.
By Massimo Trabattoni, Head of Equities for Italy at Kairos, for AdvisorPrivate’s Italian Times column.