Italian Bond Risk Spikes To 30-Month Highs As Referendum Fear Batters Banks

The risk premium for Italian sovereign debt is soaring. As anxiety grows over the outcome of the referendum, the spread between Bunds and BTPs has spiked over 50bps in the last week to its highest since May 2014.


And as goes the sovereign, so goes the banks as the ECB-inspired domestic bond buying sprees have left them drastically underperforming and fearful that any uncertainty in government could undermine any implicit support they may still have.


As Bloomberg reports, a gauge of Italian lenders on Monday headed for its lowest level in more than three months, taking its 2016 slump to 51 percent.

“It’s a nervous market at a time when liquidity isn’t great,” said Kevin Lilley, a manager of euro-area equities at Old Mutual Global Investors in London. His firm oversees the equivalent of $32 billion. “We have more political and economic uncertainties that need resolving. People are getting worried about the impact that a power vacuum in Italy could have on the refinancing needs of its banks.”


The “Italian referendum is the next big political event,” Azzurra Guelfi, an analyst at Citigroup Inc. wrote in a note Monday. “Higher sovereign spread and higher market volatility could negatively impact bank balance sheets given the large sovereign exposure.”

Italian bond risk (and referendum fallout concerns) are spreading across Europe's entire banking system, whose stocks have now erased the Trump Bump...