Italian banks near saturation point on government debt

Tue Nov 5, 2013 2:21am EST
 
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By Silvia Aloisi and Valentina Za

MILAN (Reuters) - Italian banks are near saturation point after two years spent frantically buying their own government's bonds, forcing the Treasury to find alternative investors at home and abroad to finance a 2-trillion euro debt.

Lenders' ability to soak up yet more Italian sovereign debt depends largely on the European Central Bank - which in turn says Italy is crucial to the fate of the entire euro zone.

In the coming year the ECB will make strict health checks on banks across the bloc, including a provisional 15 in Italy. It must also decide whether to roll over billions of euros in cheap long term loans which the banks have used profitably to accumulate government bonds, but fall due in early 2015.

Both events will determine how much domestic banks can keep up their support for the Treasury which was vital when the euro zone's third biggest economy teetered on the brink of a Greek-style debt crisis in 2011 and foreign investors fled.

Much is at stake. The ECB has made clear that Italy must tackle its debt and economic problems for the greater good.

"Its fate will critically determine the fate of the euro area," ECB board member Joerg Asmussen said last month. "In this sense, the future of the euro area will not be decided in Paris or Berlin, or in Frankfurt or Brussels. It will be decided in Rome.

During the euro zone crisis, the ECB launched two long-term refinancing operations (LTROs), showering banks with cheap three-year loans. Italian lenders used these to load up on higher-yielding government bonds, propping up their profits which had been hit by recession.

In August, they held 397 billion euros ($538 billion) in Italian government bonds, near a record 402 billion in June. This is nearly double what they had at the end of 2011, meaning they used most of the 255 billion in LTRO funds borrowed from the ECB in 2011 and 2012 to buy their own government's paper.   Continued...

 
A man stands in front of the Bank of Italy in Rome June 26, 2013. REUTERS/Max Rossi