The fate of Italy’s banks is still tied to public debt

IN ITALY’S BUDGET drama, the action is shifting away from Rome. Last month its populist government said it would run a fiscal deficit of 2.4% of GDP in 2019—wider than euro-zone rules permit, and than markets had expected. Cue a sharp rise in borrowing costs, to more than three percentage points above those in Germany (see chart). On October 15th it submitted its plans to the European Commission. With Brussels likely to raise objections to the budget, this spread could rise further still.

Fears about the sustainability of Italy’s huge public-debt burden have also infected its financial sector. Lenders’ share prices have fallen by 14% since the government unveiled its plans. Compared with Germany or Spain, a relatively low share of public debt—a third—is held by flighty foreigners. But that leaves the financial sector more exposed. So far banks’ improved liquidity and capital positions have cushioned the impact of sovereign-debt woes....

via The Economist: Finance and economics Business Feeds

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