Italy

The economic shock of the coronavirus outbreak is not likely to cause a downgrade to Italy’s credit rating, according to S&P in spite of the fact that its debt to GDP ratio could climb steeply in order to fund its response.

European banks are steering well clear of new issue markets during the coronavirus pandemic, avoiding having to call on investors for funding by taking advantage of attractive central bank funding schemes.

Market participants are debating whether the EU is responding quickly and strongly enough in the coronavirus crisis, after the bloc put off the question of how to involve the European Stability Mechanism on Monday evening.

The European Union is set to make at least €25bn of budget funding available for sectors affected by the Covid-19 coronavirus, as its institutions join forces to tackle the economic impact of the outbreak. Rules on state aid and public finance will also be loosened, giving member states more room to launch fiscal stimulus measures.

Market participants are calling on European financial authorities to help banks deal with the impact of Covid-19. Forbearance could come in the shape of state guarantees or in the form of the relaxation of certain elements of bank capital requirements.

Italy’s capital markets bankers are keeping calm amid the coronavirus crisis, getting used to working from home, and trying to support clients as well as they can, while wishing for help from Europe and the European Central Bank. But they are not allowing themselves to hope the worst is over. The health crisis is acute and getting worse.

Italy’s equity capital markets bankers have not thrown in the towel on 2020, despite much of the country effectively being shut down by the spread of the Covid-19 coronavirus.

Bank debt investors are growing increasingly nervous about the impact of the Covid-19 coronavirus, arguing this week that the risks in the market still outweigh the rewards.

Banco BPM unveiled an ambitious new strategic plan this week, accounting for the potential impact of Covid-19 in northern Italy. The bank intends to reduce its reliance on the European Central Bank (ECB) for funding and take advantage of regulatory changes allowing additional tier one to be included in Pillar 2 capital requirements.

The negative impact of the new coronavirus on Italian covered bonds and CMBS is limited so far, said Moody’s and DBRS in reports published on Friday and Monday. But if the outbreak spreads, the ability to repay covered bonds would be impeded with serious consequences.

UK insurer Hiscox said on Monday that it had received some ‘small claims’ relating to Covid-19, as credit analysts warned that the insurance sector was exposed to indirect impacts from the spread of the virus.

Market participants should be braced for political volatility as the world comes close to experiencing a pandemic.