CAUTION PAYS OFF: ITALIAN BANKS UNSCATHED BY

C O N F I D E N T I A L SECTION 01 OF 02 ROME 001299 SIPDIS E.O. 12958: DECL: 10/12/2018 TAGS: ECON EFIN IT SUBJECT: CAUTION PAYS OFF: ITALIAN BANKS UNSCATHED BY SUB-PRIME CRISIS ROME 00001299 001.2 OF 002 Classified By: DCM Elizabeth Dibble for reasons 1.4 b and e ¶1. (C) SUMMARY: Traditional, old-fashioned business practices prevented Italy's bankers from getting into the kind of problems plaguing their counterparts in the U.S. and elsewhere. Italian banks did not engage in sub-prime lending. There was no real housing bubble here, and almost none of the "home equity" lending that helped fuel the U.S. crisis. While Italian banks do most of their business in Italy, one of the country's largest banks -- Unicredit -- has expanded into Germany and Eastern Europe. Although many here viewed this expansion into foreign territory as inherently risky, well-placed contacts tell us that even Unicredit's exposure to "toxic assets" is very small. The Italian Central Bank was on the lookout for signs of a possible bank run in early October, but it never happened. The GOI has bolstered deposit insurance and has set up a mechanism to inject capital into banks should they develop balance sheet problems, but so far these mechanisms have not been used. The Bank of Italy is helping Italian Banks cope with liquidity problems caused by the Europe-wide slow-down in interbank lending. So far, the global financial crisis itself is having little macroeconomic impact on Italy -- the oil price rise of earlier in the year is having a bigger impact. Stock prices of Italian firms have dropped, raising concerns about buyouts by foreigners. The financial crisis could encourage "no global" moves by the left and economic nationalism from the right. END SUMMARY ¶2. (C) In support of a 21-22 October visit to Rome by Washington analysts, ECON section arranged meetings on the global financial crisis with officials of the Italian Central Bank, with Italy's SEC equivalent, and with a representative of a private sector banking association. -------------- THE BENEFITS OF BEING OLD FASHIONED -------------- 3, (C) Giorgio Gobbi, a senior analyst in the Bank of Italy told us that Italian banks have been saved from the financial sector carnage by the fact they have engaged in very "traditional banking." He explained that there was no sub-prime lending in Italy; Italian banks had a profitable business in "prime lending" and felt no need to reach down into sub-prime loans. "There was no appetite here for high �0A;risk/high return business," said Gobbi. Gobbi gently noted that Italian bankers had been criticized for being "too prudent," but went on to say that they are "quite happy" with their current situation. ¶4. (C) In a separate meeting, Federico Cornelli of Italy's stock market regulator (CONSOB) noted that while real estate prices have risen in Italy, there has not been the kind of speculative bubble atmosphere seen elsewhere. He also noted the absence of home equity loans here (due in part to high transaction costs),and described a very traditional, cautious mortgage lending system in which banks only made loans to customers who were good credit risks and who could afford the large (20-30%) down payments. -------------- UNICREDIT CAVORTING WITH FOREIGNERS, BUT SURPRISINGLY UNTAINTED -------------- ¶5. (C) With most Italian banks working in this very traditional way, when the current crisis hit, attention in Italy focused on the one Italian bank that had spread its operations beyond Italy's borders: Unicredit. With significant operations in Germany and in Eastern Europe, Unicredit's stock has taken a beating over the last several weeks, with some of the damage caused by speculation about the bank's alleged "exposure" to "toxic" assets. Post has repeatedly been told that Unicredit does not have significant toxic assets on its books; this current round of meetings confirmed this assessment. Cornelli of CONSOB attributed Unicredit's stock fall to market manipulation by short sellers who spread rumors about the firm; he said CONSOB is investigating. Gobbi of the Bank of Italy at first told us that Unicredit had in fact picked up some risky assets when it bought a German/Austrian bank, but when we pressed him to quantify the bank's exposure, he said the bad assets are "less than 1 percent of Unicredit's assets." -------------- NO SIGNS OF A RUN ON ITALIAN BANKS ROME 00001299 002.2 OF 002 -------------- ¶6. (C) In early October there had been a lot of loose talk by Italian politicians about bank liquidity. Coupled with the Unicredit stock collapse, these comments had caused Post to become concerned about the possibility of a bank run here. Giorgio Gobbi told us that Bank of Italy had been watching carefully for signs of a bank run, but did not detect any. He speculated that Italian customers might have overestimated the capability of Italy's deposit security system to protect them. -------------- PRECAUTIONARY STEPS -------------- ¶7. (C) Gobbi described GOI steps to bolster deposit insurance and to create a fund that could be used to inject capital (in exchange for equity) into any Italian banks that might run into trouble. So far, these mechanisms have not been used. (A banking sector contact told us Italian bankers would be loath to ask for this money, because the equity given to the GOI might allow the government to make changes in the banks' corporate leadership.) ¶8. (C) Gobbi said Bank of Italy is, however, actively helping Italian banks with liquidity problems related to the worldwide collapse of interbank lending. he explained that while lending among Italian banks has not really slowed, Italian banks had traditionally taken short term loans from foreign banks, and this lending is now unavailable due to the credit crunch. Bank of Italy is, he said, trying to help fill this gap, performing its traditional "lender of last resort" role. -------------- FEAR OF FOREIGN BUYERS -------------- ¶9. (C) While not directly a part of the finance sector melt-down, the drop in stock prices caused by the sub-prime crisis has stirred up concerns in Italy about the possibility that foreigners -- especially sovereign wealth funds -- could use the current situation to seize control of key Italian companies. Prime Minister Berlusconi has spoken publicly of his concerns about this possibility. Federico Cornelli of CONSOB told us that at current stock prices Intesa SanPaolo bank could be bought for 38.5 billion Euros, Unicredit for 28.6 billion, Generali (Italy's largest insurer) for 29.6 billion and Fiat for a mere 7.4 billion. The Italians are especially concerned about the possibility of sovereign wealth funds -- especially the Libyan SWF -- buying up important Italian firms. -------------- COMMENT -------------- ¶10. (C) These meetings confirmed our earlier assessment about Italy's very limited direct involvement in the sub-prime crisis. While only very small amounts of the toxic assets seem to have found their way onto the balance sheets of Italian banks, Italy will be affected in other ways. Its stock market is already suffering, and its overall economy will undoubtedly be hurt by the global economic slowdown that has been caused by our sub-prime problems. ¶11. (C) So far, Italy seems to be responding prudently to the financial crisis. We think there is a danger, however, that various groups will see this crisis as an opportunity to seek to reduce Italy's integration into the global economy. The left can be counted upon to seize this opportunity, but in the statements of politicians and some of our banking sector contacts about the perils of buy outs of "Italian companies" by foreigners, we have a reminder that there is an element of economic nationalism in the thinking of Italy's center right. Both the left and the right will seek to use the current crisis to push their own economic prescriptions -- some of which will not be helpful to U.S. trade and investment interests. DIBBLE