© Reuters.

By Geoffrey Smith

Investing.com — Nothing in Europe’s stock markets says “melt-up” like the sight of Banca Monte dei Paschi di Siena SpA (MI:) rallying.

The world’s oldest bank has long been a byword for the woes afflicting Europe’s financial sector, from bad loans to poor governance to misplaced supervisory forbearance and concentrated country risk.

For the last two years it has been grimly clinging to life after the European Commission allowed a state-led bailout worth over 8 billion euros.

Since then, what progress it has made in reducing its bad debt problem has been overshadowed by the broader rise in Italian sovereign risk, as a populist coalition government put the country on a collision course with Brussels and the European Central Bank with a blowout budget that threatened to breach EU rules.

But in the last weeks, the stars have aligned: the macro backdrop has improved as China and the U.S. declared a truce in their trade war, the European Central Bank has moved closer to loosening monetary policy and – crucially – the European Commission this week dropped its threat to start an “Excessive Deficit Procedure” against Italy. The bank itself, meanwhile, has completed the securitization of some $2.5 billion in good loans and given itself more freedom to deal with its bad ones. On Thursday, it even convinced investors to buy a 500 million euro bond, unsecured against any of its assets. In a world where safe German government debt yields -0.40%, the lure of 4% over three years from a bank propped up by benevolent authorities was too much to resist.

The bank’s stock, which was worth next to nothing until Wednesday, has now risen nearly 50% in two days. It was up 10.6% on Friday morning, while the Italian benchmark index was down 0.1%.

Europe’s other indexes are all largely trading lower after another gloomy set of data ahead of the release of U.S. data later in the day. The was down 0.4% but was still up 1.7% for the week.

It’s worth noting that Italy’s banks have all had a good week on the back of the temporary peace deal with the EU: Intesa Sanpaolo (MI:), UniCredit (MI:), Banco Bpm (MI:) and UBI Banca (MI:) have all gained between 7.8% and 9.4% as the yields on Italian government debt have tumbled.

The between 10-year German and Italian yields is now down to 203 basis points, from a high of over 300 basis points last year. Given that it was at only 122 basis points before the populist coalition took power, and given the prospect of renewed quantitative easing by the ECB, it still has room to fall much further, which will provide a powerful tailwind for Italian banks – if the government can avoid upsetting the applecart again.

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