The iShares MSCI Italy Capped ETF (NYSEArca: EWI) has tumbled more than 13% over the past month and in the eyes of some market observers, the Eurozone’s third-largest economy is facing a rising risk profile.
Excluding unfunded pension, healthcare costs and Eurozone bailout payments, Italian total real economic debt is 259% of gross domestic product, up 55% since 2007, and France’s equivalent debt is 280% of GDP, up 66% since 2007.
Italy’s budget deficit is 2.9%, with government debt at 132% of GDP, while France’s budget deficit is 4.2%, with government debt at 95% of GDP.
Unemployment remains a significant drag on the economies. Italian unemployment is over 12%, with youth unemployment as high as 44%. French unemployment is above 10%, with youth unemployment at more than 25% – unemployment in France also touched a record high of 3.55 million people in the second quarter last year, according to Dow Jones Business News.
Italy’s banking sector is facing increased pressure and that is potentially bad news for EWI, an exchange traded fund that allocates nearly 37% of its weight to the financial services sector. Like many single-country ETFs, EWI’s largest sector weight is financial services.
“The Italian banking index is down 18% this year, and Italy’s third-largest and most historically troubled bank, Monte dei Paschi, has lost 50% of its value during the same period. The most dramatic drops have taken place this week. The Italian stock market regulator has deemed it necessary to ban short selling on Monte dei Paschi stock in an attempt to prevent speculators from benefiting by driving it lower, yet it continues to fall,” reports MarketWatch.
Last year, reforms to Italy’s banking sector were seen as a potential driver of improved equity market performance. Specifically, the reforms would turn these types of banks into possible takeover targets almost instantly. For instance, the new rules could be a catalyst for a potential merger between UBI Banca and Banca Monte dei Paschi di Siena. [Catalysts for the Italy ETF]
“Italy’s banks are indeed troubled; their non-performing loans amount to more than 200 billion euros (about $218 billion), and Monte dei Paschi had an extremely weak balance sheet long before a 2013 derivatives scandal dealt it another blow. But those non-performing loans have been growing ever since 2008, and that growth has slowed of late,” adds MarketWatch.
iShares MSCI Italy Capped ETF
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.