Fears for Italian Banking Sector Weigh on EUR GBP Exchange Rate Outlook

August 8, 2016 - Written by Ben Hughes

STORY LINK Fears for Italian Banking Sector Weigh on EUR GBP Exchange Rate Outlook

UK Economic Concerns Send GBP/EUR Exchange Rate to Multi-Year Lows

European investors have focussed on the UK economy's woes in the weeks which have followed the June 23rd decision by UK voters to leave the European Union, sending the Pound Sterling euro exchange rate GBP EUR down to its lowest level in well over three years in the 1.1500s. However, fears are increasing that all is not well with the euroland’s retain banking sector, with one nation’s banks above all others providing significant cause for concern.

Eurozone Banking Concerns Could Weigh on Euro (EUR) Currency Outlook

The latest European Union banking stress test results, published 10 days ago, found that as of the end of 2015, a walloping 17% of funds loaned out by Italy’s retail banks were are risk of default. This is over three times the level of ‘bad loans’ across the European Union banking sector taken as a whole. The news raises the possibility of an Italy-specific credit crisis, echoing the 2007-09 global Credit Crunch and the earlier Japanese banking crisis of the mid-1990s; such an outcome would be likely to see several Italian banks fail and a generalised reduction in the ability of individuals and business to access credit. Analysts forecast that the downward multiplier effects on the Italian economy of such a situation would be likely to plunge the local economy into a deep recession and have contagion effects on the remainder of the euroland’s already struggling economy.

Last month’s EU stress tests revealed specific concerns about one Italian lender in particular – the 544-year old Banca Monte dei Paschi di Siena SpA (BMPS : MIL). The bank, which is officially the world’s oldest, has experienced a dramatic fall in its share price during recent weeks, sending it plunging from well over €0.7000 as recently as May to a lowly €0.2459 as of Friday’s close – a slide of some 65%. Monte Paschi now holds the worrisome title of being officially the riskiest bank in the EU if the stress tests, which assessed 51 euroland lenders in total, are to be believed. The most stringent scenario tests by the European Central Bank survey found that Monte Paschi’s balance sheet would be reduced to zero (or below), triggering a catastrophic failure.

EUR Forecast: Euro Could Dip Vs Pound, US Dollar on Italian Banking Fears

Italy’s regulators are so worried about the creditworthiness of their nation’s banks that they have instigated an emergency bailout fund – dubbed Atlante 2 - aimed at liberating Italian banks of their bad loans. Today is the closing date for payments into the fund by Italy’s financial institutions and early indications are that the contingency pot raised will be some €2.4 bn -considerably below the Italian government’s stated target of €3 bn. There is a widespread feeling amongst analysts that this amount may not be enough, given the potential for future turbulence in the euro area economy. Wolfango Piccoli of Teneo Intelligence summed up the mood on Friday, observing that the,

‘new fund to free Italy’s banks of bad loans will have at least €2.4bn of firepower, but the issue here is whether it will be enough for the next emergency.’

If Piccoli’s fears prove well-founded and Italy’s banking sector is about to begin showing signs of real distress, then analysts forecast that the recent improvement in the euro to Pound Sterling exchange rate forecast could be in jeopardy.

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TAGS: Currency Predictions Euro Forecasts Euro Pound Forecasts