Italy's public debt and domestic banks' exposure

Italy has one of the largest public debts in the world and markets are worried it may be the next victim in the spreading euro zone debt crisis due to its poor economic growth and domestic political tensions.

The yield on 10-year Italian BTP bonds rose to 6.26 percent on Tuesday, the highest since 1997 and nearly four percentage points higher than for equivalent German Bunds.

Italian banks' large holdings of domestic debt mean their shares have suffered since a sell-off in Italian assets started on July 8. Lenders have also seen their funding costs soar on the back of higher Italian bond yields.

Following are some figures on Italian government debt and domestic banks' exposure to it.

* Italian government bonds and short-term bills totaled 1,583 billion euros at the end of June according to Italian Treasury data. Their average term was 7.09 years.

Italy's public debt stood at 1,890 billion euros at the end of April, according to Bank of Italy figures. The public debt figure includes postal savings.

* Italy has raised 277.4 billion euros in debt so far in 2011, or 65.3 percent of its full-year target, the Treasury said -- suggesting further issues of 147.4 billion euros, according to Reuters calculations.

* A total of 157 billion euros in Italian government paper will fall due by the end of the year. Redemptions will peak in September, when 46 billion euros of BTP/CTZ bonds mature.

* Morgan Stanley estimates net issuance should total 35 billion euros per year in 2012-13, less than expected annual coupon payments of around 45 billion euros a year.

* A one percentage point increase in Italy's debt yields adds about 3 billion euros to interest payments in the first year, and twice that in the second, the Bank of Italy has said.

* Italy forecast in April that 2011 debt servicing costs would total 4.8 percent of GDP, or about 77 billion euros.

* The International Monetary Fund estimated in April that 47 percent of Italian 2010 government debt was held abroad. Morgan Stanley last week estimated foreign holdings at 44 percent.

* Banks domiciled in Italy held 192 billion euros in Italian government securities at the end of May, Bank of Italy data showed last month. In the first quarter of 2011 they also held 589 billion euros in government securities on behalf of their clients.

* European Banking Authority data showed in July that Italy's five leading retail banks had a net direct exposure to Italian sovereign debt of 159 billion euros. Intesa Sanpaolo is the most exposed with 57.6 billion euros, followed by UniCredit with 47.5 billion euros.

* JP Morgan and Morgan Stanley analysts estimate Italian banks' holdings of government bonds at around 6 percent of their assets -- a higher figure than 5 percent for Spanish banks and second only within the euro zone to Greek banks' 10 percent.

MS said last week that Italian banks could buy at least another 36 billion euros of government securities if they shifted back to their historical average holding of 7 percent.

* Analysts estimate that an increase of one percentage point in the average cost of Italian public debt drives a similar rise in the cost of banks' bond issues. Two analysts who requested anonymity indicated a one percentage point rise in the cost of banks' bonds, all else being equal, would cut a bank's earnings per share roughly by between 5 and 10 percent.

The impact is more significant for smaller banks and adds up over time. The effect of rising funding costs on 2011 profits should be minimal as banks have already met most of their funding needs.

* JP Morgan analysts said Italian banks will have to refinance 53 billion euros of maturing bonds in wholesale markets next year.

* The 600 billion euro Italian pension fund and insurance industry has increased its holdings of domestic government bonds by 10 percent in the last three years to 32 percent of assets, according to JP Morgan. That is more than double the comparative figure for France, and three times that for Spain or Germany.

* Morgan Stanley said domestic banks and insurance companies could quite easily buy net 60 billion euros a year in Italian government debt for the next few years.

[Source: Reuters, London, 03Aug11]

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