Italian Business and Consumer Confidence Both Fall In October

Both Italian Business and Consumer Confidence fell back in October. Between the battering the Italian banking sector is taking on the one hand, and the ongoing contraction in the real economy on the other, Italy isn't exactly in the best of shape right now. Unfortuantely, despite years of warnings little was done, and now all the chickes come home to roost, and, as if in an illustration of what the expression "worst possible case scenario" means, they all come home to roost at once.


Italian business confidence sliiped to its lowest level in 15 years in October while consumer optimism eased back as the global financial crisis darkened the economic outlook and offset the positive effects of cheaper oil prices. The Isae Institute's business confidence index fell sharply to 77.7 from a revised 81.8 in September, according to the news release from the Rome-based research center earlier this morning (Friday).



Consumer confidence also slipped nack, falling to 102.2 from 102.8. Interestingly the drop in consumer confidence is not as sharp as that in business confidence, and we are still above the July low point (when oil prices hit a maximum), but the outlook for Italian households can scarcely be better than that for Italian corporates at this point. Perhaps the financial news just takes longer to sink in, while the impact of falling oil prices is pretty immediate, at least on the consumer outlook.

Unicredit Stays In The News As East European Forex Lending Starts To Unwind

Two additional pieces on news today relating to the ongoing Unicredit issue:

Unicredit and Intesa Sanpaola Share Downgrade


UniCredit SpA and Intesa Sanpaolo SpA, Italy's largest banks, had their shares downgraded to "sell'' by analysts at Royal Bank of Scotland Group, citing a slowing Italian economy and concern about earnings. Analysts said earnings at Unicredit, the nation's largest bank, would ``regress'' given the tougher environment over the next two years while capital rebuilding looked ``suboptimal.''

Core earnings growth at Intesa is also expected to turn negative over the next two years, while the bank's current dividend policy is ``untenable,'' RBS wrote in a separate note to investors. Analysts slashed Unicredit's share price estimate by 60 percent to 2 euros and Intesa was cut by 46 percent to 2.60 euros. Both banks were downgraded from "hold".


Libya May Get A Seat On Unicredit Board

Libyan investors in UniCredit may get a seat on the bank's board "in the spring,'' according to Italian newspaper Il Messaggero, citing Chief Executive Officer Alessandro Profumo's comments to the company's directors yesterday. The investors can't be given a position immediately because none of the directors is willing to step down, according to the newspaper. The Central Bank of Libya, Libyan Investment Authority and Libyan Foreign Bank last week boosted their holding to 4.2 percent in Italy's biggest lender.

Libyan investors have increased their stake in Unicredit to at least 4.9 percent, becoming the Italian bank's second-biggest shareholder, according to this Bloomberg story yesterday. Libya's central bank governor, Farhat Bengdaraa, disclosed the holding at a meeting of African central bank governors today in Cairo. The central bank, the Libyan Investment Authority and the Libyan Foreign Bank said they held a combined 4.2 percent as of Oct. 17. It wasn't immediately clear from the comments whether the 4.9 percent stake was held by just the central bank or jointly by all three institutions (although Reuters later suggested that the central bank alone held 4.9%, which opens the door to the possibility that the Libyan Investment Authority and the Libyan Foreign Bank stakes may be additional). Libyan government-controlled investment vehicles have been active in Italy for some years now. The Libyan Foreign Bank initially started investing in UniCredit in 1997, building a 0.56 percent stake, and the Libyan Arab Investment Company is now the second-largest shareholder in Turin's Juventus Football Club.

Libyans To Make More Acquisitions?

Libya's sovereign wealth fund may buy shares in Italian construction company Impreglio after taking stakes in lender UniCredit SpA and oil company Eni SpA, news agency Radiocor reported, without saying where it got the information. Staff at Impregilo have indicated that there hasn't yet been any formal contact with Libyan investors at this point, but it is hoped that Impregilo may be involved in building a coastal highway in Libya, where it is also involved in the building of a number of university centers.

Unicredit Shares Fall Again Friday Following Government Stake Plan Report

The Italian government may buy a 10 percent stake in Unicredit the Italian newspaper MF (Milano Finanza) is reporting this morning, without citing a source for its information. The government and the Bank of Italy are monitoring the situation at the bank after its share price continued to slide yesterday, the newspaper said.


Unicredit fell to an 11-year low in Milan trading following the MF report that the Italian government may buy a stake of about 10 percent in the country's biggest lender. The bank was initially down as much as 15 cents, or 7.7 percent, trading 1.87 euros, and was back up at 1.89 euros as of 9:10 a.m. local time.

The government and the Bank of Italy have said they are monitoring the situation at UniCredit as its share price continues to slide. Officials at UniCredit and the government have declined to comment on the MF report. Shares in Italy's other mega-bank Intesa Sanpaolo SpA also tumbled after MF reported that the bank will probably cut its dividend. The shares fell as much as 9.9 percent, and were 8.6 percent, or 25 cents, lower at 2.70 euros as of 9:10 a.m. in Milan.

Unicredit Very Exposed to Foreign Exchange Lending Unwind in the East of Europe


Hungarian Prime Minister Ferenc Gyurcsány announced yesterday (Wednesday) that the government had reached an agreement with commercial banks intended to protect the interests of those who have taken out foreign currency loans. The agreement, which is expected to be signed early next week, has three key components:

1) At the request of the debtor the banks will allow the duration of the loan to be extended (with fixed monthly instalments) so that the depreciation of the forint “does not place an unbearable burden on the debtors".

2) FX debtors who deem that exchange rate fluctuations carry excessive risks for them will be allowed to convert their foreign currency-based loan to a forint loan. In this case the banks “will accept this request and make the switch without extra charges".

3) If a debtor finds him- or herself in a position where he or she cannot pay the monthly instalments, e.g. due to becoming unemployed, the banks will be amenable to transitionally reducing the instalments or even suspending them entirely at the request of the debtor.

I say "agreement" here, but in fact the banks had little alternative, since Gyurcsány made it plain to them that if they did not agree then legislation would be introduced to enforce the government package.

So here, right now, and on 23 October 2008 in Budapest ends, in my opinion, a fashion for taking out non-local currency denominated loans, which lasted the best part of a decade and sewpt across half a continent, and especially in Central and Eastern Europe . Basically government after government in one CEE country after another will now find themselves with little alternative but to follow Hungary's lead, as the parent banks turn off the tap on the one hand and the citizens themselves grow more and more nervous on the other.

full story on my Hungarian blog here.


Libyan Investment Authority Takes One Percent Stake In ENI


Libya now owns a 1 percent stake in Eni SpA, Italy's biggest energy company, and plans to increase the holding, according to la Repubblica. The Libyan Investment Authority, the country's $65 billion sovereign wealth fund, has bought almost 1 percent of Eni, "with an eye to a more organic alliance in the future" la Repubblica's weekly business section reported. Libya has developed an ``entente cordiale'' involving Mediobanca SpA Chairman Cesare Geronzi and investor Tarak Ben Ammar to help it win support for its investments in Italy, the newspaper said.


Banca Popolare di Milano Shares Fall Due To Concern About Tier I Ratio


Banca Popolare di Milano Scrl, a northern Italian bank, dropped to the lowest in almost three weeks in Milan trading this morning (Monday) after its chairman told Il Sole 24 Ore that the bank's current capital ratios may be insufficient. Popolare Milano fell by as much as 52.25 cents, or 11 percent, to 4.11 euros, its lowest since Oct. 10, before being halted for excessive losses.

Chairman Roberto Mazzotta told Sole in an interview that the bank's Tier 1 capital ratio of 6.4 percent may be insufficient. The ratio, a measure of a bank's ability to absorb losses, may not be high enough in a period in which lending is risky, Mazzotta told the daily.

``The low level of capital ratios relative to other European banks is one of the reasons we're not recommending Popolare Milano at this point,'' Cassa Lombarda analysts wrote in a research report. ``Capital management actions to strengthen its capital ratios may be needed.''

Share trading in Intesa Sanpaolo SpA, Italy's biggest bank by market value, was also suspened this morning (Monday) after they dropped to their lowest level in almost five and a half years in Milan following the announcement by Deutsche Bank that they had lowered its price estimate after cutting forecasts for margins and growth.

Intesa Sanpaolo fell by as much as 30 cents, or 11 percent, to 2.34 euros, its lowest since May 2003, before being halted for excessive losses. Milan-based Intesa now has a market value of 30 billion euros ($37 billion).

Italy To Curb The Activities Of Sovereign Wealth Funds?

The Financial Times has an interesting article on this topic today. Basically Italy's present government looks set to opposes sovereign wealth funds buying more than 5 per cent of individual Italian companies, at least that was what Franco Frattini, Italy's foreign minister, was saying yesterday.

Rome has set up a national interests committee to establish rules about the funds’ behaviour. A 5 per cent stake ceiling would make Italy one of the more restrictive markets for sovereign wealth funds among European countries. Frattini was speaking to Il Messagero, a Rome newspaper, from the United Arab Emirates where was holding talks with the Abu Dhabi Investment Authority, the emirates’ largest sovereign wealth fund. He suggested that Giulio Tremonti, Italy's finance minister, (and who has been openly hostile to sovereign wealth funds) had initiated a strategic review to examine how to “promote investments that are useful and to prevent those that are dangerous”.

The committee, according to Franco Frattini, would examine which funds adhered to the Santiago principles released this month by the International Working Group on Sovereign Wealth Funds under the auspices of the International Monetary Fund.

The issue has become topical due to the recent decision of the Libyan government to buy into Unicredit, but this does seem to be coincidental at this point, since Fratini indicated that Italy was not opposed to a 4.23 per cent stake in Unicredit, Italy’s second largest bank, taken by three official Libyan institutions last week.

Since the 24 Santiago principles stress topics like transparency, and the adoption of financial rather than political criteria for investments together with the necessity of adhere to local regulatory requirements it is perhaps odd for the external observer to find the Italian government being such a stickler, since these are mainly topics on which Italy itself scores badly in the international competitiveness rankings.