A drive to tighten rules over how much sovereign debt banks are allowed to own has raised the alarm in the home of the euro region’s largest bond market.
Italy’s prime minister, Matteo Renzi, vowed last month to veto any attempt to cap holdings, putting him at odds with Germany. Italian government securities account for 10.4% of the country’s bank assets, the most among major European economies and compared with 3.2% in Germany, the latest European Central Bank figures show, Reuters reported.
A limit would mean “altering the balance of the Italian banking system,” said Francesco Boccia, a lawmaker from Renzi’s Democratic Party who heads the budget committee in Italy’s lower house of parliament. “Banks are already struggling to lend money to small- and medium-sized companies,” he said. “This would be the final blow.”
In essence, the eurozone’s biggest debtor is on a collision course with its biggest paymaster over how to fix the failures of the past.
Having financial institutions willing to finance the government is vital to most countries, especially in Italy. The country has outstanding debt of €2.17 trillion ($2.36 trillion), more than anywhere else in Europe. It amounts to 133% of its economic output, the largest ratio except for Greece.
The problem in Berlin is that it highlights Europe’s “doom loop,” the too-tight connection between sovereigns and their lenders that fueled the debt crisis and landed Germany with the biggest bill. Chancellor Angela Merkel’s government has been leading the campaign to tackle the practice of banks treating the debt as risk-free.
Germany has resisted moving toward closer financial ties, including initiatives such as a common eurozone deposit insurance system, until progress is made on reducing risk.
