Which Banks Are Most Exposed To Italy's Sovereign Debt? (Other The The Horribly-Exposed Italian Banks)

Authored by Don Quijones via WolfStreet.com,

“Doom loop” begins to exact its pound of flesh.

Risk. Exposure. Contagion. These are three words we’re likely to hear more and more in relation to Europe, as the Eurozone’s debt crisis returns.

On Friday, Italy’s 10-year risk premium - the spread between Italian ten-year bond yields and their German counterparts — surged almost 20 basis points to 212 basis points. This was the highest level since May 2017, when a number of Italy’s banks, including third biggest bank Monte dei Paschi di Siena (MPS), were on the brink of collapse and were either “resolved” or bailed out. Now, they’re all beginning to wobble again.

Shares of bailed-out and now majority-state-owned MPS, whose management the new government says it would like to change, are down 20% in the last two weeks’ trading. The shares of Unicredit and Intesa, Italy’s two biggest banks, have respectively shed 10% and 18% during the same period.

One of the big questions investors are asking themselves is which banks are most exposed to Italian debt.

A recent study by the Bank for International Settlements shows Italian government debt represents nearly 20% of Italian banks’ assets — one of the highest levels in the world. In total there are ten banks with Italian sovereign-debt holdings that represent over 100% of their tier-1 capital (which is used to measure bank solvency), according to research by Eric Dor, the director of Economic Studies at IESEG School of Management.

The list includes Italy’s two largest lenders, Unicredit and Intesa Sanpaolo, whose exposure to Italian government bonds represent the equivalent of 145% of their tier-1 capital. Also listed are Italy’s third largest bank, Banco BPM (327%), Monte dei Paschi di Siena (206%), BPER Banca (176%) and Banca Carige (151%).

In other words, despite years of the ECB’s multi-trillion euro QE program, which is scheduled to come to an end soon, the so-called “Doom Loop” is still very much alive and kicking in Italy. The doom loop is when weakening government bonds threaten to topple the banks that own the bonds, and in turn, the banks start offloading them, which causes these bonds to fall further, thus pushing the government to the brink. The doom loop is a particular problem in the Eurozone since a member state doesn’t control its own currency, and cannot print itself out of trouble, which leaves it exposed to credit risk.

But it’s not just Italian banks that are heavily exposed to Italian debt. So, too, are French lenders, which last year had combined holdings of Italian bonds worth €44 billion, according to data from the European Banking Authority’s 2017 transparency exercise. Spanish banks had €29 billion.

Which three non-Italian lenders of consequence are most exposed, in absolute terms, to Italian debt, based on Dor’s research?

BNP Paribas, France’s largest bank, with €16 billion of Italian sovereign debt holdings.

Dexia, the French-Belgian lender that collapsed twice and was bailed out twice between 2008 and 2011. It holds €15 billion of Italian debt.

And, drum-roll please: Banco Sabadell, the mid-sized Spanish lender that already has a gargantuan self-inflicted IT crisis on its hands at its UK subsidiary TSB. It has €10.5 billion invested in Italian bonds — the equivalent of almost 40% of its entire fixed asset portfolio, worth €26.3 billion, and 110% of its tier-1 capital.

“With the data from the European Banking Authority, we estimate that the lenders that would suffer the greatest impact [of a new Italian debt crisis] are Unicredit, Sabadell and Intesa Sanpaolo,” analysts from RBC Capital Management recently warned. According to their calculations, with every 10 basis-point rise of Italy’s risk premium, Sabadell will suffer a €28 million hit to its tier-1 capital. Since the coalition between Italy’s Five Star Movement and Lega was first unveiled, on May 15, Italy’s risk premium has surged by 81 basis points.

To make matters worse, another third of Sabadell’s fixed asset portfolio is invested in Spanish bonds. They are also losing value, partly as a result of the contagion effect from Italy but also due to rising domestic political instability, and the approaching end of the ECB’s QE. In the last two weeks, yields on 10-year Spanish bonds have risen from 1.27% to 1.47% while the 10-year risk premium has surged from 72 to 110.

When yields rise, prices fall by definition, and the more prices of Italian and Spanish bonds fall, the bigger the hit the banks’ capital buffers. The more the banks suffer, the more they will shy away from their respective domestic government’s debt, resulting in further falls in bond prices. Such is the fragile relationship of co-dependence between Eurozone banks and the governments whose debt they buy in such abundance.

When banks invest heavily in government debt, they become dependent on the government’s good performance, which is clearly not a given, especially in the Eurozone. Meanwhile, the governments depend on the banks to continue purchasing their debt, which also is no longer a given. This is the “doom loop.” It’s circular. It gets kicked off when either one falters, and the consequences can be dire for both.

In the case of Sabadell, it already has enough on its plate trying to clean up the mess it has created with the botched IT upgrade at its UK subsidiary, TSB, where customers are now leaving in droves. Given that TSB represents roughly a quarter of Banco Sabadell’s total assets, the impact on the Spanish bank’s own financial health could be considerable. If the sell-off in Italian sovereign debt escalates, Sabadell will have even bigger problems on its hands.

Blackstone Group, Cerberus Capital Management, and others face a problem. Read…  Wall Street Mega-Landlords Piled into Spain’s Rental Property Boom, and Now it Hits a Wall? 


ItsAllBollocks Tue, 05/29/2018 - 05:18 Permalink

I'm confused...

The FED creates valueless money from nothing then lends the same valueless money to the government at interest, we know that. What I don't understand is why interest on something that has no value, has value. I mean, it's simple mathematics, ten percent of nothing equals nothing and nothing can change that.

Apart from being fictitious, how can there be debt?

JIMSJOE2 ItsAllBollocks Tue, 05/29/2018 - 09:41 Permalink

Not true. The FED of NY buys and sells treasuries on the secondary market from direct dealers not from treasury. Treasury raises capital by selling them at the 3 auctions weekly bought by many foreigners.

    Regardless of what you read on the net treasuries are always in great demand. What else are entities going to buy as there are no other market that are as large and liquid except currencies. Countries do not like to hold large amounts of foreign currencies as they pay no interest so they are forced to buy and sell treasuries as needed. Treasuries are why the dollar is still the world's reserve currency as there is also no replacement. China is at least 10 years away from having a liquid and large enough market to compete. Europe has no federalized bonds backed by all members so this leaves treasuries as the only game in town. This is one reason why the euro will not make it and this comes to a head in 2020/21. Of course there are many reasons why the EU, euro, many of its banks, corporations and countries will not survive in its present form. Since 2011 capital has been leaving Europe converting euros to dollars with most parking in the Dow. This is why both have risen due to capital flight. This will continue as we head to the end of 2018 and as Martin Armstrong blogged today, Europe is right on schedule to totally collapse. This has caused enormous problems for the FED as they have been desperate to weaken the dollar. Contrary to the net, a strong dollar is not good for the US economy especially exporters and banks who have lent trillions in dollar denominated loans to foreign entities and these cannot be serviced with a strong dollar. This is also why the FED is having problems going back to normal rates to bring back yield. When this much capital flows into dollars this causes strength and the FED raising rates causes strength. To say they are trapped is an understatement.

    Take what you read on the net with a grain of salt as most is bullshit. Banks that still hold sovereign debt know they can unload it at a keystroke by selling to the ECB. They have been creating 60 billion euros a month out of thin air and then having banks buy the sovereign and corporate debt and then selling to the ECB. Now the ECB knows this cannot continue as this would collapse the euro even faster and announced they will start tapering and raising rates. The only sector left to buy this crap is the private sector and they will demand much higher rates for the risks and to pay for the now expensive insurance to protect from default. Make no mistake many countries in the EU will eventually default as they are all broke and insolvent and this is why we see the chaos in Italy which will spread. Spain's pension runs completely out at the end of 2018, almost all of France's cities and towns are broke with the major reason migrants, over 50% of German cities are also broke due to the same and of course we have had Deutsche Bank complaining loudly for months that the ECB has destroyed the traditional banking model in the EU along with the economies. These are not isolated events but are happening in most of the EU. EU officials months ago ask for an emergency meeting with Armstrong Economics, (the MEPs pension fund is also running out). as they need a way out. They were told that there is no stopping the collapse. Brussels responded afterwards announcing a 25% increase in member fees, placing a tax on all financial transactions and being able to tax all EU citizens and businesses directly. Just recently both Macron of France and Juncker have called for complete debt consolidation making all EU members responsible. The Germans will not go for this as they already have the highest taxes of any western country. Can you imagine German industry coughing up billions to pay for the debt of Italy, Spain, Greece, Portugal, Ireland and even Sweden who is in deep shit?

    Now back in June of 2016 AE computer models alerted clients that if gold did not break the 1362 reversal level at July's close this would indicate that capital is again accelerating out of Europe and will cause massive dollar strength and move the Dow higher. Gold closed at 1361 and the dollar and Dow moved higher. Gold dropped to around the 1100 handle. This is all due to capital flight. There was so much capital being converted from euros to dollars and then parking at the Dow that this created dollar shortages in foreign markets prompting the FED to ask central banks to flood the system with dollars.

    This is where we are headed again at the end of 2018 to 2020/21. If you have been watching Europe you know it has already started. All of this is why for over 5 years the alt media has been completely wrong predicting a dollar and Dow collapse "any day". There is an old saying. "Follow the money!"

In reply to by ItsAllBollocks

JailBanksters ItsAllBollocks Tue, 05/29/2018 - 09:45 Permalink

As I see it: The Money all Central Banks creates is worth absolutely nothing to a banker whether it's $10 or $10 Trillion because they can always print more. So the only real money, is the money generated from Interest Rates. And they can only get that from NON-Bankers (suckers) that still believe it's worth something. If nobody's borrowing their Monopoly Money, they're not getting any Interest. This crazy system requires Banks to continuously borrow more money that doesn't exist to repay the previous money they borrowed that doesn't exist, and they keep the Interest.

If everybody cut up their Credit Cards, in 1-2  month Amex, Visa, Master and every other one would be Bankrupt with no new credit to pay off the old credit they borrowed. It's all Borrowed Money on Borrowed Time.


In reply to by ItsAllBollocks

JailBanksters ItsAllBollocks Tue, 05/29/2018 - 11:06 Permalink

2008, all the Banks demanded the Government give them a pile of free money so they could pay off their debts.

Questions is: will 2008 happen again.

As long as people and government keep borrowing more money every year, and it must be more every year, it can literally can go on for years. It sounds like a Ponzi Scheme, but it's not because the Government gets a cut.

And then there's the Treasury Bond Ponzi Scheme, where you have to sell a New Treasury Bond so you can payout an existing due Treasury Bond. And again, each Bond has to be more than the previous one or the whole system collapses.

In reply to by ItsAllBollocks

Hanomy ItsAllBollocks Tue, 05/29/2018 - 11:09 Permalink

The world needs a major paradigm shift.   Hanomy Manifesto @ Hanomy.com has solutions.   The 2nd edition comes out June 1.  

Highlights of Hanomy:

• Fundamental human needs met throughout life’s existence
• Basic human rights observed everywhere
• Sovereign debts worldwide are settled and eliminated
• Upheld liberty and freedom
• Financial contributions drawn from a portion of idle/unutilized money
No taxes on income, profit or spending
• Interest charges and usury practices abolished
• Power of money creation where it belongs - the people
• An end to the fractional reserve system
• Upheld free market principles (true capitalism but with social responsibility)
• Decreased or dissolved inflation and hyperinflation
• Reduced income inequality
• An end to corporate welfare
• Advanced technology benefiting humanity
• Freedom of time for quality of life and caregiving
• Prohibited conditions for authoritarianism
Preserved sovereignty and respected borders
• An end to “modern day slavery” (this includes you)
• Improved care of the environment and world resources
• A world we’re proud to claim and pass along

In reply to by ItsAllBollocks

hooligan2009 Tue, 05/29/2018 - 05:33 Permalink

being an active investor, prior to EURO launch date at one euro = 1.1990 dollars on 1 jan 1999, AND an observer of the "convergence trade" in european government bond yields in the three year run-up to the launch of the euro, I find this narrative around the odd 20-30 basis points in bond yields and yield spreads to be akin to the boy crying "wolf".

the correct risk premia associated with BTAN's BTP's, etc to be laughable.

the "correct" bond yields for PIIGS, Belgium and other chronic libtard socialist states within europe, started at around 5%, not the less than 3% current borrowing yield.

that 5% barely covered the default risk, political risk, time premia etc for the situation in 1996. now, more than 20 years later, these risk premia are markedly higher.

remember the ECB has rigged bond yields, so that european governments do not have to pay for their past, welfare and pension fuelled, debt accumulation.

these countries have debt to gdp ratios of around 100%, (as does the US and UK, Japan has around 250%) so each 1% rise in bond yields eventually leads to a 1% fiscal deficit - 3% = a 3% fiscal deficit - on top of current 2% fiscal deficits - and a breach of the Maastrict Treaty targets of 3% fiscal deficit and 60% debt to gdp.

the banks in Italy and Spain have non-performing loans equal to 12-20% of their entire loan portfolios. Add that to the problems at the government level.

socialism is a failed "populist" dogma that only succeeds for as long as money can be borrowed to pay for it. Socialism has borrowed the next twenty to forty years of discretionary tax revenues in order to fund "profligate" welfare, education, health and pension spending.

that spending has been enabled by a morally, economically and ethically bankrupt central bank - currently run by an italian - whose modus operandi is to throw a brick through  every window in every house in every street and lend money to those making the bricks.

libtard socialist demoNrats ARE THE POPULISTS, not those seeking to get off the bus and stop the road to ruin that these assholes are taking people down.

GreatUncle hooligan2009 Tue, 05/29/2018 - 05:53 Permalink

The socialist spending under Keynes to justify the level of money that can be borrowed to spend.

Keynes itself if the inflate and deflate were put together at the same instant in time would be NIRP when the value gained through CB inflation was far greater than the value of a persons savings is a negative %.

Thew 10 years of CB manipulation of ZIRP or near ZIRP confirms that and going NIRP would be a godsend for the banks for a shortwhile.

NIRP is you pay the banks or more eloquently put the "great bail in" so the "great bail in" will be the term used.

Changes nothing the same economic system in play will continue to create the same economic outcome.


In reply to by hooligan2009

ItsAllBollocks Tue, 05/29/2018 - 05:42 Permalink

'Italy and Spain have non-performing loans'

Perhaps but as their entire loan portfolios are based on valueless FIAT, there's nothing in them anyway. No cash, just a few clicks with the mouse. Nothing but air. No one should have to pay anyone anything because none of it existed in the first place.

Oh I see the problem, it's the banks...

GreatUncle David2923 Tue, 05/29/2018 - 06:01 Permalink

Petition at 440K now and RT is running an article on it redacted of course.

If you just [redact] the important words you can see more clearly the UK government political policy though.

Tommy[redacted] was arrested Friday outside [redacted] for a political crime? Good technique that all you people need to learn it. 

You infer by what you know because the government applies gaslighting.

Now take this article and see how much you can [redact] to prevent arrest while confering what all people already know.

In reply to by David2923

Batman11 Tue, 05/29/2018 - 05:52 Permalink

As we know Mario controls the Euro-zone bond yields.

It's not the markets, it's Mario.

He can bring the yields down if he wants.

The markets would have destroyed the Euro-zone years ago without Mario’s intervention.

buzzsaw99 Batman11 Tue, 05/29/2018 - 06:01 Permalink

It's not the markets, it's Mario.

He can bring the yields down if he wants.

The markets would have destroyed the Euro-zone years ago without Mario’s intervention...

That's what made Dalio's triple down wager against italian banks so ballsy.  he was actually betting against further ecb intervention, which means he was effectively betting on further hostile political developments in italy which would in turn cause mario to be in a sour (non buying) mood.  that's not a bet i would have made and i said so when i first read about it but kudos to him if it pays off.  it's really sad how easy it is to make money if/when the central banks stop their fuckery and how hard it is presently.  the central banks will never stop their fuckery so dalio might think about taking some off the table but then again if he listened to me he never would have made that bet in the first place.

In reply to by Batman11

Let it Go Tue, 05/29/2018 - 06:12 Permalink

 While the US and the UK were mired in political chaos during 2017 the EU claimed it was experiencing improved economic conditions. It appears this did little to move Europe in the direction of implementing long-needed EU and eurozone reforms.

Until the EU is prepared to do “whatever is necessary,” to paraphrase ECB chief Mario Draghi, in order to protect retail bank depositors, the EU will remain far from being a united political economy. More on this subject in the article below.

 http://EU Banks Remain Massive Problem.html

BigWillyStyle887 Tue, 05/29/2018 - 07:50 Permalink

Im actually surprised there are so many banks with 100% of their tier 1 capital in one of the PIGS sovereign debt. It shouldnt have been rocket science to diversify. The only thing I can think of that would make sense is that they were forced to by the government.

SmittyinLA Tue, 05/29/2018 - 07:53 Permalink

"To make matters worse, another third of Sabadell’s fixed asset portfolio is invested in Spanish bonds"

How much of the Italian and Spanish banks have invested in ECB bonds?

Looks like a circle jerk to me.

hooligan2009 Tue, 05/29/2018 - 08:43 Permalink

now.. the better question "what is the loss on these bonds at the ECB and who pays for that loss?"

obviously, the loss will be "covered" by printing even more fiat crap. what else can the ECB do?

the ECB can only save the EU from its own failed POPULIST socialist dogma by cancelling the debt that the ECB holds on its balance sheet.

the debt has already been monetized via the printing of 1's and 0's. the ECB has 6 trillion euros of this extinguished debt. That is barely 20% of the eurozone government debt market, but unless it does this, not only will it suffer massive losses on its government debt holdings (which incidentally would have suffered losses if ECB policies EVER had any prospect of success, with inflation and gdp at 2-3% each) the populist policies of the liberal socialist demoNrats will continue to bankrupt the citizens of the EU, until a flashpoint is reached when people stop paying taxes because they are unemployed (like 40% of greek youth under 30) or because they revolt against a flagrantly criminal organization - an organization that only suits bureaucrats getting paid three times the EU average wage and 5 times the EU average pension.