With the euro weakening against the Swiss franc (recently trading at session lows of 1.14) and Italian stocks and bonds tumbling once again on reports that the European Commission is planning to reject the Italian draft budget plan submitted earlier this week - a repudiation of Italy's populist leaders that was widely anticipated - the Telegraph's Ambrose Evans-Pritchard offered a glimpse into how middle-class Italians are reacting to the deteriorating relationship between Italy and the EU, and its attendant impact on the country's banks and capital markets. In a trend that's eerily reminiscent of the banking run that precipitated the near-collapse of the Greek banking system (most recently in 2015), Italians are scrambling to convert their euros into Swiss francs and stash them across the country's northern border with Switzerland.
Right now, the movement has mostly been limited to the wealthy. "The big players" have already gotten out...
The Swiss group Albacore Wealth Management told Italy's Il Sole had received a wave of inquiries from Italians with €5m to €10m in liquid capital. The super-rich are already a step ahead. "The big fish have been organizing the expatriation of their wealth for some time," it said.
...and those with between 200,000 euros and 300,000 euros in assets are moving more quickly, inspired by memories of desperate Greeks struggling with capital controls that restricted ATM withdrawals.
"There is fear creeping in," said Massimo Gionso, head of family wealth managers CFO Sim in Milan.
"People are concerned that if we get into the same situation as Greece, they might find the banks are closed and they can take out only €50 a day from cash machines. They don’t want to risk it," he told the Daily Telegraph.
"These are families with savings of €200,000 or €300,000. They want to set up accounts in Lugano or Chiasso across the border in Ticino where everybody speaks Italian. The big players have already got their money out," he said.
Since Italy is (for now at least) free of laws restricting the flow of money out of the country, these Italians are doing everything legally, with one expert claiming that authorities are informed and all transactions made on behalf of his clients are done legally. But that could soon change as the Italian government scrambles to contain a crisis that is drawing closer with every trading sessions. As one Barclays analyst told the Telegraph, "the risk of Italy sliding into an unstable debt spiral has increased." Fabio Fois said risk spreads between 10-year BTPs and bunds could move "sharply higher", possibly punching through the "tipping point" of 400 basis points. In fact, it's widely expected that they will breach this threshold if Moody’s and Standard & Poor’s later this month decides to cut their ratings on Italian debt to "junk" status. Earlier Wednesday, an Italian government official warned that a downgrade "can't be excluded".
Markets have already priced in one-notch cut in the rating but not a further negative watch as well, which would bring ‘junk’ status into sharp focus.
One analyst said the deterioration in Italy feels distinctly similar to the eurozone-wide panic of 2011.
Simon Derrick from BNY Mellon said the drama feels like the onset of eurozone crisis in 2011. "This all has a very familiar pattern. Once the spreads blow up and reach 400, you reach a tipping point and the crisis takes hold," he said.
Falling yields pose two distinct problems for Italian banks. First, since Italian banks hold sizable quantities of Italian sovereign debt on their balance sheets, any move higher in yields translates into a mark-to-market loss, and the banks get crushed. This, in turn, hurts their capital buffers, which limits the amount of money they can lend to customers. And as their capital reserves erode, the process risks sparking a "doom loop" that could send the whole system spiraling into a crisis.
However, it's worth noting that Italian deposits held "rock solid" during the 20111 crisis.
Any sign that Italians might be pulling money from bank accounts is ominous. David Owen from Jefferies said Italian deposits held rock solid through the eurozone crisis. "It was nothing like Greece where there was wholesale liquidation. So far we haven’t seen any of that in the Italian data," he said. However, figures from the Bank of Italy are released with a delay.
Though comments from the League's economy spokesman certainly aren't helping to sooth investors' fears. Neither have reports that EU authorities are monitoring Italian bank liquidity "more intensely" than usual.
Lega economics spokesman Claudio Borghi told the Telegraph last week that the EU can expect "Armageddon" if it tries to force Italy to its knees. "They will find that the crisis is not Greece squared, but Greece cubed. This would be a thousand times worse," he said.
And while large depositors pulled 72 billion euros out of Italian banks during May and June, money started flowing back in over the summer as Finance Minister Giovanni Tria tried to make nice with the European Commission. But the party bosses of the League and Five Star Movement are back in control, and betting that the EU will back down on its insistence that Italy abide by strict budget rules that would cap its deficit at 0.8%, far less than the 2.4% Italians are calling for in the proposed budget. And the ECB has already said it won't come to Italy's rescue in the event of a banking or sovereign debt crisis unless it secures a bailout from the European Stability Mechanism - an unlikely scenario unless Italy concedes in the budget deficit battle, which would be a crushing political blow to the ruling populist coalition. Once thing is for sure: Italian capital outflows data will become increasingly important to the market, assuming the standoff continues and BTP yields continue moving higher.