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State bailout of Italian banks could re-ignite 'doom loop' concerns: S&P Global

Published 05/23/2017, 10:46 AM
Updated 05/23/2017, 10:50 AM
© Reuters. A man walks in front of the Monte dei Paschi bank in Siena

By Abhinav Ramnarayan

LONDON (Reuters) - An Italian state bailout of some of its banks could create a vicious circle of dependency between the sovereign and its banking sector and reignite concerns about the "doom loop", S&P Global's top sovereign analyst said on Tuesday.

Given that Italian banks are among the biggest lenders to the state, with a share of more than 20 percent, a potential bailout for some lenders may have an indirect impact on Italy's sovereign rating if there is a sell-off in Italian government debt, said S&P Global's Moritz Kraemer.

He saw no immediate impact on the rating.

"If you have a sell-off in Italian government paper, say if there is a tapering announcement, then the Italian banking system will be extremely exposed because of the Italian government bonds on the balance sheet," he told Reuters.

"If this issue raises its head and you also have state bailouts of the banking sector, it becomes a vicious circle. It adds another layer of complexity."

A senior Italian treasury official said on Tuesday that Banca Monte dei Paschi di Siena (BMPS), Italy's fourth largest lender, is close to reaching an agreement with the European Commission that will pave the way for a state bailout.

Italy's parliament in December approved a 20 billion euro plan to prop up the country's weaker banks, including BMPS.

"We have been here before and it’s not that the Italian banking problems are idiosyncratic to one or two banks; it’s a widespread issue," he said.

"It is uncertain it will prove to be sufficient this time round."

This program raises wider concerns over whether new regulations can break the "doom loop" between the state and the banking system, Kraemer said.

"The regulation that forces banks to bail in creditors, that was hailed as a major breakthrough. This is a test case for that regulation," he said.

© Reuters. A man walks in front of the Monte dei Paschi bank in Siena

Kraemer said 20 billion euros - even if used in full - would only have a limited impact on Italy's total debt, which is close to 2 trillion euros.

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