Spain's €100bn (£80bn) bank bail-out has left investors worrying that Italy could be next. And after credit rating agency Moody's downgraded the credit ratings of 26 Italian lenders last month there are reasons to be concerned.
But it's the Italian economic slump - the economy contracted by 0.8 per cent in the first quarter - that Moody's sees as the biggest threat. It cites economically-related problems, such as mounting bad debts and collapsing credit demand as recession and austerity measures bite, as key threats. "Italian banks are particularly vulnerable to adverse operating conditions, which are likely to cause further asset quality deterioration, earnings pressure, and restricted market funding access," said the agency.
Crucially, unlike lenders in Spain, Italy's banks largely avoided overdosing on property. Most don't look radically undercapitalised, either. UniCredit, for example, boosted its capital with a €7.5bn rights issue this year and most other Italian lenders have come up with a combination of measures, including asset sales, to bolster balance sheets. In fact, European Banking Authority stress testing has identified only one bank - Monte dei Paschi di Siena, with a €3.3bn capital shortfall - that looked like it might struggle without state help.
