Good morning,

Markets are called to open higher this morning. This is what's happening today:

  • Bank of Japan Governor Haruhiko Kuroda said he’ll consider extending bond maturities for the bank’s asset purchase fund;
  • ECB says it won’t stop Cypriot central bank from providing the island’s banking sector with emergency funding;
  • Eurogroup Chairman Dijsselbloem debates Cyprus in Dutch parliament;
  • Netherlands, U.K. sell bonds. Italy, Switzerland sell bills;
  • Companies in Europe reporting results today include Mediaset and Finmeccancia

This morning, the most interesting article I came across was in the Wall Street Journal and it assessed teh situation in Italy and what how a similair bailout would effect Italian banks.

Italian banks racked up steep losses yesterday as investors began to grasp the implications of the Cyprus bailout: For the first time in Europe's five-year-old debt crisis, depositors will have to shoulder some of the burden of bailing out troubled lenders.

Intesa Sanpaolo, Italy's largest bank by domestic assets, fell 6.2%, while its main rival, UniCredit, fell 5.8%. Other financial shares also fell sharply as did debt-heavy utilities like Enel and Telecom Italia.

"The Cyprus crisis arrived just when we most need to advance on the banking resolution crisis mechanism and introduce [collective] deposit insurance at the European level. The push to have these issues resolved at a local level are now high." said Giovanni Pirvano, a board member of the Italian Banking Association.

Unlike Cyprus, banks in Italy have a large bondholder base, presumably putting these investors, along with shareholders, ahead of depositors in the line of fire. While that may make their savings accounts safer, it still raises funding costs for banks, eating into their profits and making restored balance sheets all the more elusive.

Reports that senior euro-zone officials in Brussels no longer see depositors as off limits in future bank crises–drove credit-default swaps–a proxy for wholesale borrowing costs–higher on Italian banks.

Mediobanca slashed its earnings forecasts for Italian banks by 20%, saying the market was growing complacent and warning that economic growth will return only if banks are encouraged to strengthen their capital and leverage ratios.

Politics, both in terms of national rivalries and inertia, "has become the problem for Europe rather than the solution" and market investors may need to apply some "healthy selling pressure" to trigger any progress, said Antonio Guglielmo, an analyst based in London.

Italy's political vacuum is beginning to weigh, with Pier Luigi Bersani still uncertain about whether he has a mandate to form a new government. His center-left coalition emerged as the narrow winner of last month's general election. Little clarity can be expected until after Easter.

Italy's political impasse could even reflect on the country's sovereign credit rating, Mr. Bersani said Monday.

While traders in Milan exchanged claims that Moody's is poised to downgrade Italy, the rating agency and the Italian treasury declined to comment.

Yields on Italy's five-year bonds inched up only 3 basis points to 3.30% – compared to 0.35% for similar German bunds – but a more poignant issue is the gap between Italy's own t-bills and its bonds, said Mr. Guglielmi at Mediobanca.

The gap between three-month paper and five-year bonds is now 2.78% compared to a gap of 0.34% for Germany.

That suggests that while the European Central Bank has practically eliminated the risk of a euro breakup, the issue of solvency hasn't been settled for Italy, Mr. Guglielmi said.

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Good day and happy trading!

Kristian Camenzuli