Italian Banks Tumble as Letta Government Teeters: Milan Mover

Italian banks fell in Milan trading as Prime Minister Enrico Letta fought to save his administration, driving the spread between Italian and German government bond yields higher.

Intesa Sanpaolo SpA, Italy’s second-biggest bank, declined as much as 5.6 percent and was down 3.5 percent to 1.53 euros at 11:44 a.m. UniCredit SpA, the nation’s biggest bank, fell 2.4 percent to 4.66 euros. The FTSE Italia All-Share Banks Index, which has gained 13 percent this year, dropped 3 percent.

“The renewed political uncertainty is likely to lead to rising sovereign spreads and this will negatively affect cost of funding and cost of equity of the Italian banks,” Azzurra Guelfi, an analyst at Citigroup Inc., wrote in a note today. “Given large exposure of banks to Italian sovereign bonds, this would reduce the bank shareholder equity.”

Letta said he’ll request a confidence vote in two days to try to save his five-month-old administration after Silvio Berlusconi withdrew his support from the ruling coalition and pulled his ministers from cabinet. The rift between Letta and Berlusconi, a three-time prime minister, has pushed up Italian bond yields and threatens to impair the country’s ability to deliver on its budget commitments.

Italy’s 10-year yield climbed 9 basis points to 4.51 percent, after reaching 4.66 percent, the highest level since June 20. The gap in yield between Italian 10-year government bonds and German bunds widened 10 basis points to 274 basis points. A basis point is a hundredth of a percentage point.

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