French banks hit by Italy's political crisis

The resignation of Italian Prime Minister Mario Draghi and the parliamentary elections on September 25 are worrying the markets, which fear that the far-right will come to power. The Italian subsidiaries of BNP Paribas and Crédit Agricole are among the 14 major Italian banks to have been placed on negative outlook by Moody's.

Italy, one of BNP Paribas and Crédit Agricole's main markets

Political uncertainty in Italy is already having an economic impact on the country's banks, particularly the Italian subsidiaries of BNP Paribas and Crédit Agricole.

On August 9, Moody's placed BNL (Banca Nazionale del Lavoro), the Italian subsidiary of BNP Paribas, and Crédit Agricole Italia under negative outlook. This decision points to a probable downgrading of these two banks in the medium term, as well as those of the 12 other major Italian banks concerned.

The impact is far from negligible for BNP Paribas and Crédit Agricole, for whom Italy is currently one of their main markets after France. Crédit Agricole has 16,000 employees in Italy, its second-largest market with revenues of 3.7 billion euros in 2021.

As for BNP Paribas, its Italian subsidiary employs 17,000 people and generated revenues of almost 5 billion euros last year. For the banking giant, Italy is a major market after France, on a par with Belgium.

Italian banks face several risks

According to Moody's, the negative outlook is justified by several risks facing Italy's 14 major banks.

Firstly, the political crisis, but also Italy's dependence on Russian gas, could undermine consumer and business confidence. As a result, bad debts are likely to pile up in the event of repayment difficulties on the part of borrowers.

Furthermore, if Italy's rating were to be downgraded, the same would apply to the rating of certain Italian banks. Indeed, as the rating agency explains, the sovereign rating assigned to a country is generally higher than the ratings of the banks operating in that country.

Last but not least, the sharp rise in Italy's 10-year borrowing rate and thegrowing spread between the borrowing costs of southern European countries are reminiscent of the crisis that hit the eurozone in 2011.

While the European Central Bank's 10-year low interest rates have so far warded off the spectre of a new crisis, the trend is beginning to reverse under the pressure of inflation, which has prompted the ECB to raise its key rates by 50 basis points.

At the end of last year, Crédit Agricole's exposure to Italian debt stood at 15.8 billion euros, and BNP Paribas's at 9.4 billion euros.