Rising interest rates in Europe old ghost haunting Italy’s banks - the “doom loop.”

 The doom loop — a phenomenon in which banks, holding a pile of government debt, are forced to take a hit to their capital as yields on that government debt rise and the price of the debt drops.  Weakened, the banks cut lending, hitting the economy and government finances, and creating a negative spiral. 

The doom loop brought Italy to the brink of a sovereign debt crisis in 2011. There was another scare in 2018 when antiestablishment parties prevailed in parliamentary elections. 

The European Central Bank is expected to unveil a special bond buying program later this month  The “anti-fragmentation” program 

UniCredit has cut its domestic bondholdings, which are now lower than 5% of total assets, according to Citigroup. But they are still 80% of its tangible equity

Jérôme Legras, head of research at Axiom Alternative Investments, doesn’t believe the eurozone is in for a 2011 sovereign debt crisis repeat because of the ECB’s commitment to control government-bond yields in the periphery. 

WSJ 5 July 2022

https://www.wsj.com/articles/doom-loop-fears-are-putting-italian-banks-to-the-test-11656981837

ECB’s new tool may come up short

Megan Greene FT 28 June 2022

https://englundmacro.blogspot.com/2022/06/ecbs-new-tool-may-come-up-short.html

So what’s a doom loop?

https://englundmacro.blogspot.com/2022/04/so-whats-doom-loop.html