Italy’s government is concerned that merger deals between some of the country’s largest financial groups could reduce its ability to recall domestic investments during a crisis, according to a report by POLITICO.
For instance, Milan-based UniCredit, Italy’s second-largest bank, and Trieste-based Generali, the largest insurer, are exploring cross-border alliances. For policymakers, who are still grappling with the memories of the 2011-2012 eurozone crisis and facing four years of economic uncertainty with Donald Trump potentially returning to the White House, this is a worrying prospect.
In Italy, where national debt exceeds €3 trillion, or 137% of gross domestic product (GDP), the government is highly sensitive to the need for a solid and reliable investor base.
According to data from the Bank of Italy, foreign investors, who are typically more fickle, now hold more than 30% of Rome’s outstanding debt. This has led to a situation where the government feels it has less influence over its investors. Morningstar analyst Javier Rouillet notes that it is “reasonable” for Italy to seek a more “diversified” investor base in this context.
Two sources familiar with the government’s thinking revealed that politicians have long held a belief, albeit mistaken, that local companies are more trustworthy because they buy bonds for “patriotic” reasons. This belief is often exploited by local lobbyists pushing for softer regulations. However, Italian banks and insurers, like their foreign counterparts, purchase Italian bonds not to please the government but because of their favorable risk/return profile.
A government official stated, “Having our debt in domestic hands is an objective to ensure that the interest paid stays within the Italian economy. It’s not about financial institutions doing what the government wants, but there has always been a clear domestic bias in Italian-owned investment companies.”
The Ministry of Economy and Finance’s current plan involves selling up to €350 billion in bonds to finance the 2025 budget and refinance old bonds coming due, amounting to approximately €1 billion per day.
Barclays analysts noted that this figure includes €73 billion from the European Central Bank (ECB), which has begun reducing its assets after a decade of asset purchases. The Eurosystem, through the Bank of Italy, held more than a quarter of the government’s bonds at the end of September.
On the other hand, Italy’s borrowing costs have increased by 0.6 percentage points over the last six weeks. If these costs remain above 3.8%, the debt burden will grow faster than the economy can absorb, warned AXA Investment Management chief economist Gilles Moëc in a note to clients on Monday.
However, a finance ministry spokesperson highlighted the strong relative performance of Italian bonds in recent months and the fact that they still offer a significant premium compared to their eurozone peers.
Italy, France, and Germany face off
Regarding mergers, policymakers are particularly concerned about the €2 trillion merger between the asset management arms of Generali and Paris-based conglomerate Natixis, according to two sources familiar with the matter.
Talks have been ongoing for several months. Some officials worry that Generali, one of the largest historic holders of Italian government bonds, could “lose its commitment” to Italian debt in the future as part of a larger group dominated by the French. This could exacerbate Italy’s situation in the event of another financial panic, one source noted.
This development has prompted Rome to consider whether it can use its executive screening tools to influence the deal, the source added.
Similar concerns surround UniCredit’s controversial move to acquire Germany’s second-largest bank, Commerzbank. These concerns are not limited to Rome; the move has also sparked reactions in Berlin.
A report by Moody’s in October argued that an increase in the German share of UniCredit’s balance sheet would “loosen the intrinsic correlation between the creditworthiness of UniCredit and the creditworthiness of the Italian government.” This would likely lower UniCredit’s borrowing costs in the market.
However, as Commerzbank chairman and former German central bank chief Jens Weidmann noted in an interview published on Monday, the flip side is that it would expose Commerzbank’s clients in Germany to potential instability in Italy. Weidmann told Handelsblatt that such a takeover would amount to a “backdoor mutualisation of sovereign debt.”
According to company filings, UniCredit holds around €38 billion in Italian sovereign debt, while Generali holds over €30 billion.
Italy’s fear of falling behind
Italy’s skepticism about potential partnerships is also fueled by the fact that such deals often end up favoring the non-Italian partner. For Italian authorities, the defense of Commerzbank appeared particularly hypocritical, especially in light of Germany’s Lufthansa recently acquiring Italian airline ITA.
The Generali deal has reignited concerns about “French economic imperialism.” Alessandro Aresu, a geopolitical analyst and adviser to former Prime Minister Mario Draghi on investment screening, noted that most of these mergers are one-sided.
In recent years, Crédit Agricole has acquired several local banks, particularly in northern Italy, while BNP Paribas has owned Banca Nazionale del Lavoro, Italy’s sixth-largest bank, since 2008. Philippe Donnet, CEO of Generali, is also French.
While French companies have taken over Italian firms in various sectors, from luxury to media, there have been few major deals in the opposite direction. One such deal, the proposed merger between shipbuilder Fincantieri and France’s Chantiers de l’Atlantique, ultimately collapsed due to French opposition.
Prime Minister Meloni has criticized what she described as French takeovers of Italian giants, including the deal that created the automotive group Stellantis, which remains under scrutiny.
Aresu remarked that it is unsurprising that Rome has an “atavistic fear” of Generali entering French territory, adding that “Italy’s confidence will not be restored until important deals are done in which the Italian actor is the acquiring party.”