Italy

Italy’s crisis gives the European Central Bank tough choices as it tries to tread a line between containing market turmoil and sticking to plans to end its crisis-era monetary support, the Financial Times reported. The dilemma is made even more acute by the nationality of the ECB’s president. Mario Draghi, head of the Bank of Italy before his ECB appointment, knows better than anyone his country’s importance to his current mandate to ensure eurozone stability.

The latest jolt to European political stability may be an opportune time to snap up Italian banking shares, many of which have just resurfaced from years of being in the doldrums, Bloomberg News reported. “It’s definitely a close-your-eyes and hold-your-nose purchase,” said Ben Kumar, a London-based money manager at Seven Investment Management, which manages about $16 billion.

Investors face a rapidly rising cost to protect against a default on Italian debt, marking the latest sign of the mounting concern about the Southern European country, the Financial Times reported. Spread on Italy’s five-year credit default swap, an instrument that provides investors a payment upon a debt default, rose to 224 basis points on Tuesday from 174 bps on Monday, according to Markit data compiled by Reuters. That means it now costs $224,000 a year to insure a notional $10m of Italian five-year debt against default.

Asia-Pacific equities were mostly lower in early trading on Tuesday as the political crisis in Italy worsened, investors favoured government bonds and the yen strengthened, the Financial Times reported. Among the region’s major benchmarks, the Topix index in Tokyo and the Kospi in Seoul each fell 0.6 per cent, while Hong Kong’s Hang Seng dropped 0.5 per cent.

Banca Popolare di Bari ScpA, an Italian regional lender weakened by bad loans, plans to raise as much as 350 million euros ($410 million) from investors this year to strengthen capital and complete the bank’s cleanup, people with knowledge of the matter said. The lender will seek at least 250 million euros of fresh funds, the people said, asking not to be identified because the matter is private, Bloomberg News reported. The bank hasn’t decided on the method of the capital increase and may consider listing the company, two of the people said. A spokesman for the bank declined to comment. Pop.

In a related story, the Financial Times reported that investors last week withdrew the most money in nearly two years from western European funds, after the election in Italy of two populist parties raised concerns about the country’s commitment to the eurozone and its fiscal policies. Equity funds investing in the region suffered $2.6bn of outflows in the week that ended on May 24, and bond funds saw withdrawals of $1.8bn of investor cash, according to EPFR.

Monte dei Paschi di Siena’s bonds have led heightened selling in Italian bank debt, as new policies mooted by the incoming populist government threaten to raise the cost of future funding for the sector, the Financial Times reported. The Italian government last year rescued the world’s oldest bank, which had to agree to a restructuring programme with EU authorities that included branch closures.

Italian assets were pummeled again on mounting concern over the populist coalition’s fiscal plans, with the moves rippling across European debt markets, Bloomberg News reported. Bond yields climbed to the highest levels in almost three years, while the premium to cover a default in Italy’s debt was the stiffest since October.

In a move that doubtless prompted relief across Europe, Italy's populist about-to-be government made clear that it is not now looking for the European Central Bank to write down 250 billion euros ($295 billion) of Italian sovereign debt, a Bloomberg View reported. At least that was the reassuring message to markets from the latest set of meetings between leaders of the Five Star Movement and the League.

Italian stocks and government bonds came under heavy pressure from reports that coalition talks between the two leading populist parties could result in a government that breaks with eurozone economic orthodoxy, the Financial Times reported. According to the reports, the anti-establishment Five Star Movement and far-right League had discussed proposals to ask the European Central Bank to write off about €250bn of its holdings of Italian debt, and to call for the creation of a mechanism to exit the euro.