Italian banks' debt purge 'unprecedented'

Italian banks reduced their holdings of sovereign debt by €12.6 billion ($21.5b) in December.

Italian banks are selling off their domestic sovereign debt at unprecedented rates, leading to concerns that they will be hit hard when the European Central Bank ceases quantitative easing.

Italian banks reduced their holdings of sovereign debt by €12.6 billion ($21.5b) in December, and by €40b in the final three months of 2017, equivalent to 10.5 per cent of stock, according to analysis by investment advisory firm Jeffries.

Marchel Alexandrovich of Jeffries said: "This move in recent months is unprecedented, and in sharp contrast to what's taken place in Portugal."

The latest sell-off comes as the EU's third largest economy prepares to head to the polls in a close-run general election on March 4.

There are also fears that the robust growth in manufacturing seen in the recent months could weaken as the euro gains strength, dampening the appetite for Italian exports which have driven economic growth.

Claus Vitisen of Pantheon Macroeconomics said that while bonds will be sold off ahead of the election, "ample domestic liquidity suggests that the weakness will be short-lived".

JP Morgan Asset Management has said Italian debt is undervalued and could offer a "buying opportunity".

Other major investment firms are neutral on Italy's domestic debt.

There are growing concerns however about the long-term stability of Italian sovereign debt. Pier Carlo Padoan, the Economy Minister, warned last week that he was worried about proposals from senior European Union officials to differentiate the risk scores to government bonds of different countries that banks hold in their portfolios.

Padoan told Reuters that he was concerned the move would encourage banks to sell off riskier bonds.

Recent polls ahead of the general election have shown the race is neck-and-neck in a three-way split between the centre left, centre right, and the populist Eurosceptic Five Star Movement.

Matteo Renzi, former Prime Minister and head of the centre-left Democratic Party, has proposed paying young people an incentive to leave their parental homes.

Renzi has pledged a payment of €150 for bamboccioni, literally translated as "big babies" in a bid to encourage the nearly two thirds of 18- to 34-year-olds who still live at home to move out.

The effect of young people living with their parents even into their late 30s is a tense political issue in the country which still struggles with a high rate of 32 per cent youth unemployment.