Italy: the Meloni government announces a 40% tax on the “superprofits” of banks, their stock market quotations fall

2023-08-09 17:30:00

ECONOMY – The titles of the main Italian banks fell yesterday Tuesday August 8 on the Milan Stock Exchange, weighed down by the decision of the government of Giorgia Meloni. Deputy Prime Minister Matteo Salvini announced Monday evening a 40% tax on the “excess profits” of banks in previous years, to offset the cost of soaring interest rates for households and businesses. “It’s not a few handfuls of millions, but a few billions”explained the leader of the League, a far-right party and member of the government coalition led by Meloni.

To fight against inflation, the European Central Bank (ECB) has been raising its key interest rates for several months. These are short-term prices, set by central banks and used to steer monetary policy, control the money supply and regulate a country’s economic activity. These three key rates are the refinancing rate, which allows banks to increase loans to households and businesses; the rate of remuneration of deposits which remunerates the reserves of commercial banks at the central bank; and the marginal lending rate that allows commercial banks to borrow cash.

“A measure of fairness”

At the end of July, the ECB announcement a ninth consecutive increase in its key rates. The refinancing rate thus rose to 4.25%. Result ? “The ECB rate hike has increased the cost of money for households and businesses”, explained Matteo Salvini in Rome, after a Council of Ministers on Monday. Italian banks, like their European competitors, have seen their profits increase significantly while their customers find themselves harmed: they suffer an increase in their borrowing rates and their current accounts are not remunerated accordingly.

Thanks to the rise in ECB interest rates, Intesa Sanpaolo, Italy’s leading bank, for example, recorded an 80% jump in its profits in the first half, reaching 4.2 billion euros. Of the “superprofits” that the Meloni government has decided to tax up to 40%. “It’s not a few handfuls of millions, but a few billions. It’s a measure of fairness,” continues the Deputy Prime Minister.

This tax must be paid by next summer, that is to say June 2024. A government source explains that the accounting years concerned are those of 2022 and 2023. The 40% tax, applicable on the part exceeding the amount of the previous financial year, is only deductible if the net interest income recorded in 2022 exceeds by at least 3% that recorded during the previous financial year, in 2021. For the profits recorded in 2023 compared to 2022, this threshold is raised to 6%. However, the amount of this extraordinary tax cannot exceed a proportion equal to 25% of the value of the net assets of the bank.

The coalition government led by Giorgia Meloni, President of the Council, is also betting on this tax to raise funds for the 2024 budget. This is penalized by a 0.3% decline in GDP during the second quarter of 2023 and the revenue collected from the tax on the “superprofits” of banks will be paid into funds which finance tax reductions on households and businesses.

Fall in European bank prices

On Tuesday, the securities of Italian banks on the Milan Stock Exchange tumbled. Intesa Sanpaolo lost 7.7% on the value of its shares. UniCredit, which made half-year net profit of 4.4 billion euros on the back of the ECB’s interest rate hike, saw its shares fall 6.2%. Ditto for other banks such as Monte dei Paschi di Siena (-7.3%), Bper Banca (-7.7%), Banco Bpm (-6.7%) and Mediobanca (-2.9%). French banks established in Italy such as Crédit Agricole (-2.56%), BNP Paribas (-1.49%) and Société Générale (-1%) were dragged into the fall of Italian banks.

The Meloni government’s announcement has thus plunged the European banking sector into uncertainty and the other banks are recording declines of 2 to 3% in their prices. Bank of America analysts estimate that this tax could cost banks between 2% and 9% of their results. “I think the one-off tax Italy has imposed on its banks has taken the market by surprise, and there are fears that other governments in Europe will follow suit.”according to one analyst.

With this measure, Italy is following in the footsteps of Spain. At the end of 2022, the Spanish left-wing government introduced an exceptional tax of 4.8% on banks during the financial years of 2023 and 2024. Three billion euros will have to be collected in two years for the benefit of public finances. The decision was criticized by the European Central Bank, which warned against “potentially negative consequences” of this tax on the banking sector. The ECB has called on the government led by socialist Pedro Sánchez to guard against “risks to financial stability, resilience of the banking sector and lending”who could “negatively affect economic growth” Spanish.