Right-Wing Italian Government Announces Soviet-Style 40% Windfall Tax On Bank Profits, Sparks Market Chaos

Italy’s right-wing government made an unprecedented decision by applying a windfall tax charging a 40% withdrawal from banks' profits.

The tax, which strategically targets the net interest margin, disrupted the financial landscape Tuesday despite its aim to inject fresh resources into Rome’s debt-challenged coffers.

By tapping into the heavy gains that banks have amassed due to the favorable interest rate environment, revenue can be channeled toward a housing mortgage fund and alleviate the tax burden experienced by both households and businesses, the Council of Ministers wrote.

Italian Bank Revenues Soared As ECB Hiked Interest Rates

Italy’s decision to unveil this substantial tax policy comes against the backdrop of an unforeseen 0.3% contraction in the country’s GDP for the second quarter of 2023.

Major players within the Italian banking sector have recently reported stronger-than-anticipated balance sheets, coupled with upgraded forecasts, bolstered by the European Central Bank’s string of interest rate hikes, which have contributed positively to the banks’ financial health.

Over the past year, the European Central Bank (ECB) has hiked interest rates for nine consecutive times, propelling the main refinancing operations rate to 4.25%, the highest it has been since October 2008, and the deposit facility rate to an over 22-year high of 3.75%. Italy’s leading financial institution, Intesa Sanpaolo Spa ISNPY reported record-high quarterly revenues that soared to an astonishing $6.34 billion.

Markets Punished The Move

The Milan stock market was the worst performer in Europe, with the FTSE MIB index plummeting by 2.5%, marking its most significant decline since mid-March. This downward trend is anticipated to extend to the iShares MSCI Italy ETF EWI on Tuesday.

The banking sector, in particular, bore the brunt of the tax announcement. Intesa’s shares experienced a considerable drop of 8%, representing its most significant single-session decline since March 2022. Similarly, Unicredit Spa UNCRY witnessed a 6.5% decrease, underscoring the sector-wide impact of the tax decision.

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