Greek bank shares came under renewed selling pressure on Monday as a rout in Italy’s bond market eroded appetite for riskier euro zone assets.
Piraeus Bank, Greece’s biggest bank by assets and already the subject of recent selling on concerns over its plan to issue subordinated debt, tumbled more than 8 percent as did No. 3 lender Eurobank.
They helped push the Greek banking sector index down 6 percent by 1103 GMT.
“We are in a risk-off environment as long as bonds remain under the hammer. This hits bank shares across the European south,” said a Greek bank treasurer. “We have been affected by the Italian virus.”
A selloff in Italy’s bond market gathered pace, and the euro weakened, as comments from Italian Deputy Prime Minister Matteo Salvini fueled concern about a clash with the European Union over Italian budget plans.
In the fixed income market, the yield on Greece’s 10-year benchmark bond jumped 14 basis points to 4.65 percent.
The Greek banking index has now shed more than 37 percent this year with the selloff intensifying in early October on fears that banks’ efforts to reduce their bad loans burden will prove difficult, affecting profitability prospects.
“The pathology is known, what triggered the selloff was the market’s magnifying glass which focused on the tough part ahead to reduce bad loans as a war of words erupted between Rome and the EU over budget plans,” the treasurer said.
Last week bankers and government officials confirmed that Athens is considering an asset protection scheme to help its banks offload soured loans and speed up the clean-up of balance sheets. The scheme may involve state guarantees.
“The creation of an asset protection scheme, in which the Greek government provides insurance for the sector’s bad debts, would go some way to stem the sell-off in Greek bank shares, were it to not require any losses from private sector investors,” ratings agency Fitch said in a report.
“Such a situation would shift risks from the Greek banking sector to the Greek government,” it said.
But any depletion of Greece’s own funding buffer or a solution that may involve government funding over the coming years would likely bring its own fiscal position into focus, Fitch said.
“It remains our core view that Greece will meet its primary budget surplus targets of 3.5 percent of GDP in 2018 and 2019, however a banking sector bailout would pose major downside risks to this view,” it said in its report.