Italian bank shares strengthen ahead of ECB decision

Italian banking shares strengthened on Tuesday on expectation that the European Central Bank will extend its quantitative easing programme when its governing council meets on Thursday in Frankfurt.

Amid reports that Italy's third-largest bank, Monte dei Paschi di Siena, may be preparing for a state bailout, the European Central Bank is expected to signal that it will extend its asset-purchase programme beyond March 2017.

The bank had been expected to consider tapering its bond-buying programme, launched in March 2015 on Thursday, but the threat of political instability in Italy following Sunday's defeat of a referendum on constitutional reform means that an extension is likely to be considered.

Risks

In a note to investors, Barclays said it expects a decision on tapering to be postponed at least until March 2017. "We think that the elevated political risks are likely to be an important argument against the ECB making a tapering announcement on Thursday," the bank said.

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Meanwhile backroom negotiations were taking place yesterday between Monte dei Paschi, the European Central Bank and the European Commission about a rescue plan for the troubled bank, which is looking to raise up to €5 billion by the end of the year.

Amid fears that a capital-raising proposal may unravel, an injection of public funds is likely, but EU state rules introduced in the wake of the financial crisis prohibit state bail-outs without a bail-in of creditors.

The European Commission, which previously agreed a compromise rescue plan with Italy in July that would compensate retail investors, confirmed on Tuesday that it was in contact with the Italian authorities.

Speaking after an Ecofin meeting of EU finance ministers in Brussels, EU vice-president Valdis Dombrovskis said that authorities were ready and prepared to act if and when needed. "We are in close contact with Italian authorities," he said, though he declined to comment on individual banks such as Monte dei Paschi.

Rally

But Slovakia's finance minister Peter Camzir, who chaired the meeting as Slovakia currently holds the rotating presidency of the Council, emphasized that the bail-in rules had been difficult to negotiate, and must be kept front and centre during any discussion on the Italian banking sector.

Speaking after the meeting, German finance minister Wolfgang Schaeuble said he was concerned Italy might be facing a period of uncertainty, but he added that he was confident in the ability of those overseeing the Italian banks.

Italian financial stocks rallied yesterday and the euro fell to a three-week low against the dollar ahead of Thursday’s ECB meeting.

But Monte Paschi fell for the fourth consecutive day in trading in Milan, extending its decline so far this year to 85 per cent.

EU finance ministers also debated new European Union proposals on bank capital announced by the European Commission last month, but the proposals were criticised by a number of ministers. In particular, a suggestion that banks be allowed hold capital buffers only in their home countries was shot down by some member states.

Tax

Ministers also endorsed a communiqué promising “fair and competitive” corporate taxation across the EU.

But they failed to agree new proposals on so-called "hybrid mismatches" – a tax device that is used by the Netherlands in particular.

A decision on an EU Financial Transactions Tax (FTT) which is being pursued by ten EU countries, excluding Ireland, was also postponed, raising questions about the future of the tax.

Commissioner Dombrovskis said that although the proposal to tax financial transactions was only being taken by a sub-group of EU countries under a procedure known as enhanced co-operation which allow certain countries to proceed with EU laws if they have sufficient support, he expected progress next year.