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Italy Post Market Rout Windfall Tax Cut

Italy announced easing windfall bank tax after the market rout on Wednesday (8/9). The surprise move, in which Prime Minister Giorgia Meloni’s populist-leaning administration aims to claw back some of the profits banks have reaped since interest rates began rising last year. Several European countries, including Spain and the Czech Republic, have also followed the tax announcements on banks’ windfall profits in the past year as interest rate hikes by central banks have beefed up many lenders’ earnings. Moreover, the tax imposition stunned the market, discouraging foreign investors and sending shares to local lenders to tumble. As the public’s reaction was not amusing, the country’s rightwing government, led by the prime minister, Giorgia Meloni, appeared to backtrack on terms of the windfall tax less than 24 hours after it was announced. On Tuesday (8/11) night, it was published that lenders would pay no more than 0.1% of their assets, making it lower than original analyst estimates that expected the cap to hit 0.5%. An analyst from Jefferies Investment Bank showed a hypothesis to limit collective payout from some of Italy’s most significant listed banks – accounting for half of Italian deposits to about US$2.2 billion. The change comes a day after Meloni’s government announced the windfall tax to target banks accused of reaping billions in extra profit from rising interest rates.

In a surprising turn of events, the Italian government, under the leadership of Prime Minister Giorgia Meloni, has unveiled an unexpected windfall tax directed at banks' earnings. The announcement significantly impacted financial stocks, catalyzing a notable profit recovery. The tax, set at 40%, explicitly targets the profits accrued by banks due to higher interest rates, with the economy minister emphasizing that its impact would not exceed 0.1% of their total assets. The Italian government has announced its intention to impose a 40% tax on the net interest margin, likely for 2023, with payment expected by mid-2024. The announcement closely follows Intesa Sanpaolo, the largest bank in Italy, revising its annual profit projections upward, reigniting apprehensions about potential excessive profits among retail banks. This unexpected change in government policy helped ease worries among investors about the overall health of European banks. Despite the beneficial outcome on the financial situation, analysts have noted that the sudden imposition of the windfall tax caught the market off-guard, consequently leading to diminished market confidence and heightened concerns. The tax is implemented to redistribute a portion of banks' significant profits. This step is backed by government data highlighting its economic and social rationale. Despite the subsequent market turbulence and critique, government officials, including Deputy Prime Minister Matteo Salvini, have supported the tax. They assert that its implementation will ultimately benefit mortgage holders, lower-income people, and individuals depending on modest pensions.

The potential disruption in the Italian banking sector emerged due to forecasts suggesting that an upcoming windfall tax might erode up to 12% of their earnings in 2023, a deduction arrived at by Citi analysts. Meanwhile, Bank of America's calculations pointed to government gains ranging between 2 to 3 billion euros from this tax imposition. This estimate was consistent with insider reports suggesting that the treasury's collection might fall below the 3 billion euro mark, mirroring the proceeds from a recently applied windfall tax on energy corporations. As a result of these looming financial changes, the market reacted swiftly, triggering substantial stock declines for major Italian banking players. Notably, Intesa Sanpaolo and UniCredit, the country's two largest lenders, saw their stock values plummet by 8.2% and 7.2% respectively. The impact was equally significant for BPER Banca and FinecoBank, which experienced drops of 10.5% and 8.8%. In contrast, the broader European banking sector displayed resilience in the face of these challenges. The Stoxx Europe 600 Banks index rebounded by 1.7% following a prior 3.5% slump. This bounce-back resonated across the global stock market, contributing to an overall positive trend. Italy's proactive approach to addressing concerns surrounding the proposed windfall tax on bank profits played a role in alleviating market anxieties. The situation also highlighted the potential for such financial measures to transcend monetary implications, often evolving into critical political issues, as highlighted by Deutsche Bank strategist Jim Reid. This underscored the complex interplay between financial policies and their broader societal impacts.


Financial Times



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