Australia insulated from Italian bank risk

Speaking to Mortgage Business’ sister publication InvestorDaily, AMP head of investment strategy and chief economist Shane Oliver said the Italian government’s efforts to bail out a number of banks are being stifled by current EU arrangements.

“What the Italian authorities are trying to do is inject capital into some of these banks, particularly Monte dei Paschi, and the rest of Europe is arguing that under the bank support mechanisms that have been put in place a year or two ago, any recapitalisation should involve a bail-in,” Mr Oliver said.

Fitch Partners has noted that approximately one third of Italian bank debt is held by retail investors, who are trying to bypass a bail-in (in which creditors take a loss to support the banks’ recovery).

“We believe the Italian government would want to avoid a bail-in following the political repercussions [that occurred] when it had to impose losses on retail investors in late 2015,” the group said.

Mr Oliver added that Australia’s market is unlikely to feel the effects directly, though a drop in confidence in Europe could slow global growth.

“It would only be a severe economic impact for Australia if, for example, Europe can’t work this out and then you see a situation where Italy slides back into recession, and that affects confidence across the whole of Europe,” he said.

[Related: UK headed for ‘shallow recession’, says NAB]