“Italy in markets’ crosshairs as Meloni readies difficult budget…”

This budget is Meloni’s first real economic test since she came to power last October.

Italy is under growing market scrutiny as Prime Minister Giorgia Meloni prepares a difficult 2024 budget, with investors dismayed by government moves affecting sectors from banks to airlines.

The task is made all the harder by a weakening growth outlook and costly financial incentives for green home improvements which were introduced long before she took office but continue to weigh on public accounts.

“With the European Central Bank backing off as a buyer of Italian bonds she’s now going to have to make the kind of choices that have slow-punctured every other Italian coalition for the last 30 years.”

Meloni has much less room for manoeuvre than when she hiked deficit targets in her first budget a year ago.

Now there is a growing emphasis on fiscal consolidation at the European level, with governments negotiating over new fiscal rules to be introduced next year after they were suspended in 2020 due to the COVID-19 pandemic.

This comes amid signs of souring market sentiment towards Italy, something Meloni can ill afford as long as she needs buyers for a public debt equal to about 142% of national output, proportionally the second largest in the euro zone after Greece.

‘HIGHER DEFICITS, LOWER GROWTH’

The gap between the yields on Italian benchmark 10-year BTP bonds and safer German Bunds has risen to around 1.86 percentage points (186 basis points), the widest since late May.

“The supportive factors that allowed the spread to reach our 160 basis point bull-case scenario have vanished,” Morgan Stanley said this month in a note to clients. “We expect higher fiscal deficits and weaker growth.”

It forecast the spread would rise to 200-210 basis points by the end of the year.

Italy now expects this year’s deficit to overshoot at around 5.5% of GDP compared with a 4.5% official target, sources have told Reuters.G.

Rome also plans to raise its 2024 budget deficit target to between 4.1% and 4.3% of GDP, up from the 3.7% goal set in April, sources familiar with the matter told Reuters on Monday.

After a cautious start, Meloni’s rightist government began raising investors’ eyebrows when it repeatedly attacked the European Central Bank over its interest rate hikes, and then refused to sign off on an EU reform of its bailout fund.

Italy is the only EU country holding out against reform of the fund, called the European Stability Mechanism (ESM), with its ruling coalition concerned the proposed changes will make it more likely Rome will have to restructure its debt.

INTERVENTIONISM AND UNCERTAINTY

Roberto Perotti, economics professor at Milan’s Bocconi university, said the proposed limit on air fares showed Meloni’s Brothers of Italy party has “no free-market culture”.

Days after the bank tax, Brothers of Italy tabled a plan to allow debtors to pay off their arrears at a discount, effectively setting a profit cap for firms that buy the bad debt from banks to then make money from enforcing its repayment.

Meloni subsequently said no measures were planned regarding non-performing loans, but her party’s proposal is still before parliament and uncertainty persists.

Meanwhile, economic pitfalls are mounting up. Aside from the budget and the tensions over the ESM, Italy is also struggling to meet policy targets agreed with Brussels to unlock billions of euros of post-pandemic recovery funds.

It is not just investors who are fretting about Italy. Two EU central bank governors, also speaking on condition of anonymity, told Reuters at a recent gathering of EU policymakers that they were concerned about Rome’s public finances.

A third said the Bank of Italy’s frequent dovish remarks raise doubts about its inflation-fighting commitment, and a fourth said the ECB should not completely halt its government bond purchases due to the risk of a surge in Italian yields.

Malta:

Lombard Bank aims to grow its loan book to €1 billion in three years

Lombard Bank aims to grow its loan book by €280 million to reach €1 billion over the next three years as it seeks to exploit synergies made possible through its majority shareholding in MaltaPost and capitalise on other banks’ closure of retail branches.

In an announcement on the Malta Stock Exchange, the bank said it had met licensed financial intermediaries for an information session about its impending two-for-three rights issue.

Existing shareholders eligible to subscribe to the new shares will be invited to attend a separate session in due course, the bank said.

The bank said it believes its “target market is attractive and offers substantial growth opportunities with relatively low risk,” adding that it is seeking to improve its market penetration through a wider geographic presence.

The growth in its loan book will primarily come from an increase in commercial and home loans. Lombard Bank says that it has registered “consistent demand” for commercial loans, while its home loan offering generates “strong interest with high conversion rates”. In fact, home loans now account for close to a quarter of all its outstanding loans, up from under 14 per cent just four years ago.

The targeted mix by 2026 is 65 per cent commercial and 35 per cent home loans.

Lombard Bank also sought to position itself in contrast to other banks, some of which have closed down branches in recent years: “While others choose to retreat, we prefer to selectively expand our branch network,” it said.

Lombard Bank is the ultimate owner of MaltaPost, and offers a number of financial services through the postal operator’s branch network, including home loans. Through MaltaPost, it also has a 25 per cent stake in IVALife Insurance Limited and a 49 per cent stake in PostaInsure Insurance Agency. It said that it intends to transfer knowledge from the bank to the postal operator to continue evolving its service offering.

Lombard Bank has generated a return on equity over the last four years of between 5.4 per cent (2020) and 12.8 per cent (2022). Meanwhile, its total capital ratio, leverage ratio, liquidity cover ratio and all other regulatory requirements are above the regulatory minimums.

Malta Company Announcements:

APS Bank plc

The Board of directors declared an interim dividend of €0.056 per share, to all shareholders as at close of trading on 23^rd August 2023. Shareholders can choose to receive the dividend either in cash or through new ordinary shares at a price of €0.57 per share.

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