Unknown unknowns stalk the banks

THERE is by now a depressing familiarity to investors’ Eurozone moodswings. They begin with a nagging anxiety about mounting debt levels, sweep into panic mode and overselling that forces policymakers into action, and then embark upon an excessive relief rally.

The difference, this week, is that bank share prices rebounded despite politicians’ least impressive performance to date. Little has changed since last week, when Italian finance minister Guilio Tremonti declared, in a fit of hubris: “If I fall, then Italy falls. If Italy falls, then so falls the euro. It is a chain.”

Investors with the stomach for intraday share price swings of over five per cent should enjoy the ride while they can.

But for the more staid wealth manager, Italy’s banks are fast-becoming a no-go zone. That is partly because, in addition to direct holdings of government bonds, there is a further unknown: banks’ and insurers’ exposure via structured products linked to sovereign debt.

The degree of uncertainty means that despite mostly healthy capital buffers following a frenzied round of issuance this year (UniCredit being a notable exception), Italian banks will find it increasingly difficult to make the markets see reason.