Italy’s tax on banks could jolt investor trust

A drive to shore up its political base and appeal to the less well-off lay behind the Italian government’s decision to impose a windfall tax on banks but its clumsy handling could do more harm than good by shaking investor confidence.

A market rout prompted a hasty clarification on the one-off 40% bank levy, which the government later said would be capped at 0.1% of bank assets in line with European Union recommendations. The Treasury expects to draw less than 3 billion euros ($3.3 billion) from the measure, sources have said, or roughly 3% of this year’s budget deficit target.

The surprise initial move, announced at a news conference late on Monday, has damaged investor confidence in Italy and shown lapses in the government’s communications strategy.

“We consider the tax debacle a credit negative for Italian banks as an illustration of rising political risks in Italy,” said Suvi Platerink Kosonen, senior sector strategist, financials, at ING, according to a Reuters report.

The levy targets the rise in profits banks booked from sharply higher rates by hiking loan costs but not deposit rates. The proceeds will be used to ease the pressure on mortgage holders, as well as those on low incomes and small pensions. Matteo Salvini – a deputy of Prime Minister Giorgia Meloni and one of Italy’s most vocal populists – announced the plan at the press conference where Economy Minister Giancarlo Giorgetti was noticeably absent.

“Giorgetti represents a pro-market soul of the coalition, and Salvini is a populist. That (the news conference) was a clear demonstration of ambiguity,” said Giovanni Orsina, politics professor at Rome’s Luiss university.

Giorgetti’s department put out a statement almost 24 hours later highlighting the existence of a cap, helping to reassure investors in the short-term.

“The cap has made a huge difference,” said Stefano Gatti, a banking professor at Milan’s Bocconi University, calculating the hit to banks’ core capital had been reduced to a third of the initial estimate. However, the move heightens investors’ risk perception of Italian lenders, whose cost of capital is already influenced by Rome’s high debt and vulnerable economy.

“Capitalism that weakens bank lending will never lead to prosperity,” said Cole Smead, an investor in leading Italian bank UniCredit.

Both Meloni’s Brothers of Italy and Salvini’s League parties have built part of their reputation on an anti-establishment platform which depicted banks as greedy institutions.

Meloni’s government had toyed with the idea of a bank windfall tax but appeared to have set it aside. Giorgetti, who is deputy leader of the League, had lately merely urged banks to narrow the gap between loan and deposit rates.

“We are taxing unfair behaviour on the part of the banks. We are only taxing the extra profits resulting from the gap between interest income and expenses,” Giovanbattista Fazzolari, a senior government undersecretary, told Reuters. The new tax hits the increase in net interest income for 2022 or 2023 above certain thresholds. The administration turned its attention to banks after recently coming under fire from the opposition for curbing a poverty relief scheme, adds the Reuters report.

“They hit the banks, which are the symbol of power, to show they are close to weaker households, as if they felt an overwhelming desire to present themselves as Robin Hood,” said Francesco Galietti, founder of political risk firm Policy Sonar.

While still high, the government’s approval rate is at its lowest since taking office in October with some 49% of Italians expressing a positive opinion on the administration at the end of July, based on a poll in Corriere della Sera newspaper. While Spain and Hungary have also hit their banks with one-off taxes, it could have greater impact in Italy given how central lenders are to its economy.