UniCredit, Intesa Tumble as Debt Contagion Threatens Italy

UniCredit SpA and Intesa Sanpaolo SpA, Italy’s biggest banks, fell to the lowest in more than two years in Milan yesterday as contagion from Europe’s debt crisis threatened to spread to the region’s third-largest economy.

UniCredit plunged 7.9 percent, the biggest decline since March 30, 2009, while Intesa dropped 4.6 percent. Both hit lows not seen since the period when markets were emerging from the crisis spawned by the collapse of Lehman Brothers Holdings Inc.

Investors are concerned Italy is moving too slowly to curb its public debt, as political infighting threatens to delay a plan to push deficit-cutting measures worth 40 billion euros ($57 billion) though Parliament later this year. Italian bonds dropped for a fifth day, driving 10-year yields to a nine-year high. The extra yield investors demand to hold the securities instead of benchmark German bunds rose to the highest since before the euro was introduced in 1999.

Banks are being hurt by “concerns related to the sovereign-debt crisis, because they are the most exposed to the Italian government bonds,” said Massimiliano Romano, head of research at brokerage Concentric Italy in Milan. “The risks may further increase if bond yields remain at their current levels.”

Italy has so far avoided the crisis that forced the European Union and International Monetary Fund to bail out Greece, Ireland and Portugal. Italian policymakers are seeking to balance the budget by 2014, while banks in the country are boosting capital to strengthen finances.

Debt Burden

Still, Italy’s government debt will reach 120 percent of gross domestic product this year, leaving Greece as the only euro-region nation with a larger burden, European Commission forecasts show. Standard & Poor’s and Moody’s Investors Service said in the past two months that they may cut the country’s credit rating because slow economic growth will make it tough to curb debt.

“There are concerns that the budget plan will not be approved, or that a lighter version will be approved,” said Angelo Drusiani, a fund manager at Albertini Syz & Co. “This would mean a downgrade of Italian debt. Considering that the Italian banks are the most exposed to the debt, investors are selling financial stocks and bonds,” he said.

Banks Pass Tests

Responding to the market turbulence, Bank of Italy Governor Mario Draghi said July 8 he’s certain the country’s lenders will pass European stress tests by a “significant” margin.

Results of the second round of European stress tests will be released July 15, the European Banking Association said yesterday. Banks that fail this year’s tests may need to present plans for making up their capital shortfall by the end of September, according to an internal EU document.

Intesa, Monte dei Paschi di Siena SpA, Unione di Banche Italiane ScpA and Banco Popolare SC have asked investors for a total of 10.5 billion euros this year to strengthen capital before the stress evaluations. UniCredit, which has raised 7 billion euros in the last three years through two securities’ sales, said it will meet stricter rules through its earnings.

Credit growth in Italy has been expanding at an annual rate of 6 percent to 7 percent, “which is the highest in Europe,” Draghi told reporters in Aix-en-Provence, France.

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