The risk of the euro area breaking up is minimal even as a lack of political leadership to resolve the region’s debt crisis undermines the currency, says Alessandro Profumo, chief executive officer of UniCredit SpA, Italy’s biggest bank.
“Until a few months ago, we were seeing zero chance, now we can see a 2 percent risk” of the euro unraveling, Profumo said in a May 21 interview at the bank’s Milan headquarters. “The euro will continue to remain alive. The main issue is not a stronger or weaker euro, but the speed of changes.”
The euro should stabilize after declining to the lowest against the dollar in more than four years on May 19 and stocks should rally, Profumo said. European equities are weak “not because of the expected performance of companies, but because the mood of the euro is negative,” he said.
“Today I would get into European equities,” said Profumo, adding the onus is on government officials to stem concerns about contagion from the near default of Greece and to rein in budget deficits. “There aren’t leaders with a strong European commitment. We are missing Mitterand and Kohl,” he said, referring to the former French president and German chancellor.
Fallout from the debt crisis threatens to choke growth in the region where UniCredit generates most of its profit and also hurt the economies of neighboring central and eastern Europe, which accounts for almost 17 percent of the bank’s revenue. UniCredit first-quarter profit rose 16 percent to 520 million euros ($660 million) on gains in trading income and commissions.
Profumo used the opening of the European markets brought about by the euro to expand outside of Italy. UniCredit spent $61 billion on European takeovers from 2005 to 2008 to become the EU’s eighth-largest bank with 949.9 billion euros of assets.
Purchases included Munich-based HVB AG, Germany’s third- biggest bank. UniCredit now owns the largest lenders in Poland, which is vying to join the euro, and Austria and operates in 22 countries.
“We are based on the euro project,” the 53-year-old CEO said.
Profumo didn’t rule out further acquisitions in the region. “In central and eastern Europe, there are countries, where if opportunities arise, we have to analyze them,” he said, adding that the company’s main focus is on “organic growth.”
Loan demand remains weak with net interest income at the bank under pressure and the cost of risk declining from peak levels during the second quarter of 2009, Profumo said.
UniCredit ended little changed at 1.73 euros in Milan and is down 23 percent this year, compared with the 12 percent drop of the 52-member Bloomberg Europe Banks and Financial Services Index.
The single currency may stay close to the current level of $1.257 until evidence emerges that countries are reducing their budget deficits, Profumo said. Greece’s budget deficit was 13.6 percent of gross domestic product last year, more than four times the EU’s 3 percent limit. Ireland had the region’s biggest shortfall at 14.3 percent.
“If there will be significant cuts of the deficits, we should see some strengthening of the euro,” Profumo said. “The problem in these cases is that governments have to explain what they will do in order to foster growth.”
The drop in the euro does have benefits as it will bolster European exports and limit inflation, he said. Long-term interest rates may fall because of easing inflation expectations, Profumo said.
“In this case, the euro should remain more or less at the level we are seeing today,” he said. “This level is good enough for the export capability of the European economy.”
Profumo said the rout in European stock markets caused by the debt crisis has created bargains. The benchmark Stoxx Europe 600 Index benchmark rose 0.4 percent to 237.97 in London, after falling last week to the lowest level since November. UniCredit’s own shares dropped to a 12-month low of 1.53 euros on May 7.
Profumo, a former McKinsey & Co. consultant, became CEO of Credito Italiano in 1997 and started transforming the northern Italian lender into UniCredit, a bank with businesses ranging from the U.S. across Europe to Kazakhstan.