Italy’s Bond Angst Shapes Meloni Strategy From Defense to Banks #ItalyFinance

(Bloomberg) — For Italian Prime Minister Giorgia Meloni, the debt crisis that caused Silvio Berlusconi’s downfall remains such an unnerving memory that it keeps driving her decision-making.

From boosting defense spending to fretting over insurer Assicurazioni Generali SpA and trying to direct banking consolidation, the premier’s approach is shaped by the still-vivid trauma of seeing her political mentor felled by financial markets more than a decade ago, according to people familiar with her thinking.

Meloni can take in her stride a sputtering economy, rowdy coalition partners and a volatile global backdrop, but the prospect of a widening of the spread between Italian and German 10-year bond yields is what really scares her, the people say. They declined to be identified citing private discussions.

“Clearly, when nations like ours have to deal with debt, there are risks that need to be taken into account,” she told reporters in Brussels on Thursday at a European Union summit on how to bolster the region’s defenses, which is now the most pressing squeeze on public finances.

Such primal angst harks back to 2011 when that market measure of the risk of lending to Rome versus Berlin — “lo spread” as it’s known locally — became a catchword discussed in the streets. As a junior minister, Meloni witnessed the political chaos as the gauge’s climb to 570 basis points led to Berlusconi’s resignation as prime minister. By comparison, it was at just 113 basis points on Monday.

The wrath of the bond market was further instilled in Meloni when she came to power in October 2022 and saw UK leader Liz Truss concurrently forced out of her job amid investor alarm at her economic policies. The premier has vowed that fate won’t befall her, according to the people, who say the concern informs a large part of her economic thinking.

Meloni’s approach to ramping up defense spending to counter Russian aggression is the most recent manifestation of her preoccupation about borrowing too much. Italy’s military budget of around 1.5% of gross domestic product last year was one of NATO’s lowest tallies — less than in Germany, France and the UK, though more than in Spain.

How to raise that amount is a major challenge. Given Meloni’s fear of debt, Italy plans to propose a financial vehicle to mobilize private capital for strategic defense and aerospace projects via EU and member state guarantees, according to people familiar with the matter.

The instrument could see €16.7 billion ($18.1 billion) of public money leverage as much as €200 billion of private investment over three to five years, the people said. The EU meanwhile has offered a loosening of fiscal rules, claiming that as much as €800 billion in additional spending for the bloc can be achieved that way.

The Generali example also showcases Meloni’s market apprehensions. The company reached a deal with France’s BPCE SA in January to combine investment units and create Europe’s second-largest asset manager, with each side owning 50% of an entity overseeing about €1.9 trillion.

Generali has repeatedly said it would retain ownership of its own assets and that the deal would open the country to more international investors.

But Meloni’s entourage is exploring ways to ensure control of Italian debt stays within the country. The premier is unsettled by the prospect that the deal could ultimately allow control of one of the biggest hoards of its bonds to shift to Paris, the people say.

The Generali matter is important enough to impact Meloni’s strategy in a recent wave of finance industry consolidation.

Meloni and Deputy Prime Minister and League leader Matteo Salvini had planned to shepherd a union of Banca Monte dei Paschi di Siena SpA and Banco BPM to create Italy’s third largest banking group after UniCredit and Intesa Sanpaolo SpA. That was thwarted when UniCredit SpA Chief Executive Officer Andrea Orcel made an unsolicited bid for BPM.

With a 12% stake in Monte Paschi, which was nationalized in 2017, Rome was running out of options for its long-waited dream of creating a new banking hub until January, when Monte Paschi — long seen as a potential acquisition target itself — stunned investors with a bid for Mediobanca SpA.

The move was backed by Meloni, along with real estate mogul Francesco Gaetano Caltagirone, and Delfin, the holding company of Italy’s Del Vecchio family that had been enlisted to help with its privatization.

If successful, the government would not only create a new national champion, but it would also gain influence over Generali, because Mediobanca is that company’s largest shareholder — and both Delfin and Caltagirone hold stakes in it.

For all Meloni’s machinations, she and her coalition know that Italy’s public finances won’t escape the scrutiny of investors as long as debt remains so high — above 130% of gross domestic product.

It’s with such priorities in mind that Finance Minister Giancarlo Giorgetti has so far managed to keep the deficit on track to narrow toward the European Union’s 3% ceiling despite the need to meet populist promises by each of the three parties in the country’s fractious coalition.

Meloni’s government has further sought to lessen market vulnerability by pushing retail bond sales with the aim of getting more debt into domestic hands, under the assumption that they’re less likely than fickle international investors to sell up in times of trouble.

The result is an aura of fiscal restraint that has impressed ratings agencies and won market confidence for now. While investor concerns in 2022 pushed the spread to above 250 basis points, just before Meloni took office, it has narrowed steadily ever since.

But the premier isn’t complacent and flashbacks of a Berlusconi-style meltdown will remain a guiding force to the government’s decision-making as long as Meloni is in charge, the people say.

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