Business

MILAN — Italian Prime Minister Giorgia Meloni's government watered down its surprise windfall tax on banks this week after a brutal market reaction, but the damage to investor confidence was done.

"The most damaging impact... will not be the hit to the earnings of Italian banks but the higher risk premium that investors will demand to compensate them for the risk of future government intervention," noted Johann Scholtz, analyst at Morningstar. 

Meloni's hard-right government announced out of the blue on Monday night that it would levy a 40-per cent tax on banks' "surplus profits" generated by interest rate hikes, due to last one year.

Shares in Italian banks plunged the next day on the Milan exchange, losing 9.5 billion euros ($10.5 billion) in capitalisation — a figure well in excess of the money Rome had hoped to raise from the tax.

That evening, the government announced the levy would be capped at 0.1 per cent of the total assets of a bank, causing them to recover some of their lost ground in trading on Wednesday and Thursday.

But ratings agency Moody's said on Thursday that the one-off tax would "lower profits systemwide and significantly reduce the benefit of increased interest rates to the sector".

Parliament must still approve the decree law but if implemented in its current form, the levy would represent "about 15 per cent" of Italian banks' net income in 2022, it said.

'Haphazard manner' 

It was Meloni's first showdown with the markets since she took office in October, after her far-right Brothers of Italy Party came top in September's general election.

Initial alarm at the potential for radical change in the eurozone's third-largest economy gave way to relief as Meloni mostly followed the path set by her predecessor, former European Central Bank chief Mario Draghi.

One of Draghi's ministers, Giancarlo Giorgetti of the far-right League party, stayed on as Meloni's economy minister.

He reassured banks in June that a windfall tax was not on the cards — but was absent on Monday when the measure was unveiled by League leader Matteo Salvini.

"An economy minister who does not show up for a press conference in such an occasion gives a very bad image of the country," noted Francesco Giavazzi, a former economic advisor to Draghi.

"The haphazard manner of the announcement, where the government changed the terms of the tax at least three times in one day, will do little to restore investor confidence," added Scholtz.

'Populist target' 

While Meloni left the announcement of the tax to Salvini, her deputy prime minister, she defended it in a video posted on social media on Wednesday.

She criticised the "unfair margins" of the banks, and said the money raised would help "fund measures of support for households and businesses" struggling with record inflation.

Italian banks, like their European counterparts, saw their net interest income soar in the wake of the European Central Bank's rise in interest rates.

According to the Italian media, Meloni agreed with Salvini to introduce the measure to help appease their right-wing electorate.

The government — which also includes the Forza Italia party of late former premier Silvio Berlusconi — has been criticised for cutting an anti-poverty mechanism and blocking opposition calls for a minimum wage.

"Banks are an easy populist target and their bashing can only attract political support," said Lorenzo Codogno, former chief economist at the Italian Treasury.

But he warned that "a Soviet-style tax" such as this week's levy "risks producing permanent damage to the attractiveness of Italy's economy".

PARIS — The International Energy Agency (IEA) said Friday it had revised upwards its forecast for global oil demand growth in 2023 as demand is "scaling record highs".

World oil demand already hit a record 103 million barrels per day in June and August and "could see yet another peak", the Paris-based IEA said in its monthly report.

"For 2023 as a whole, global oil demand is set to expand by 2.2 million barrels per day to 102.2 million barrels per day," it said.

China accounted for 70 per cent of growth, the IEA said, adding that demand in the Asian giant was "also stronger than expected, reaching fresh highs despite persistent concerns over the health of the economy".

"World oil demand is scaling record highs, boosted by strong summer air travel, increased oil use in power generation and surging Chinese petrochemical activity," the IEA said.

The forecasted expansion in global demand in 2023 would mark its "highest ever annual level", according to the agency, which in February had already forecast an annual record for the year of 101.9mbd.

The increasing demand for oil comes amid tensions on world markets after significant output cuts by several members of the OPEC+ alliance — made up of 13 members of the Organisation of the Petroleum Exporting Countries (OPEC) headed by Saudi Arabia and their 10 allies led by Russia — to prop up prices.

As a result, global oil supply plunged by 910,000 barrels per day (bpd) in July, to 100.9mbd, the IEA said in its report.

A sharp reduction in production by Saudi Arabia last month saw output from the 23-nation OPEC+ alliance fall 1.2mbd, to 50.7 mbd "a near two-year low".

Volumes by non-OPEC+ members rose to 50.2mbd, the report added.

Price increase 

on horizon? 

In April, several OPEC+ members decided to slash production voluntarily by more than 1mbd — a surprise move that briefly buttressed prices but failed to bring about lasting recovery. 

Oil producers are grappling with falling prices and high market volatility, reflecting continued fallout from the Russian invasion of Ukraine and China's faltering economic recovery. 

Saudi Arabia also announced last week that it was extending its voluntary oil production cut of 1mbd for another month to include September.

Moscow has pledged, too, to cut production by 500,000bpd in August, and a further cut of 300,000bpd for September.

"Market balances are set to tighten further into the autumn as Saudi Arabia and Russia extend supply cuts at least through September," the IEA said.

If the bloc's current targets are maintained, oil inventories could fall in the second half of the year "with a risk of driving prices still higher".

Looking ahead to 2024 as the world races to combat climate change and reduce the use of fossil fuels, the IEA said it anticipated demand growth to slow.

"With the post-pandemic rebound running out of steam, and as lacklustre economic conditions, tighter efficiency standards and new electric vehicles weigh on use, growth is forecast to slow to 1 mbd in 2024," it said.

WASHINGTON — US economic growth and wage gains should "serve as a source of resilience" moving forward even if the economy continues to cool, Treasury Secretary Janet Yellen said in remarks released on Friday.

"I still believe that there is a path to continue reducing inflation while maintaining a healthy labor market," she said, in excerpts of a speech to be delivered in Nevada next week.

"While there are risks, the evidence we've seen so far suggests that we are on such a path," Yellen added.

The world's biggest economy has defied expectations of a slowdown, picking up pace in the second quarter of the year, supported by business investment and consumer spending. Its labor market has remained robust as well.

The strength comes despite policymakers' efforts to ease demand and rein in inflation, fueling hope that the central bank's aggressive campaign of interest rate hikes will lower price increases without triggering a major recession.

Yellen noted in prepared remarks that annual inflation is now nearly six percentage points below its 9.1 per cent peak in June 2022, while the economy continues to expand.

Real average hourly earnings have increased over the past year as well, reversing some wage inequality that has accumulated in recent decades, she added.

"I expect the important gains that we've made over the past two-and-a-half years to serve as a source of resilience in the weeks and months to come, even if we see further cooling in our economy," Yellen said.

In July, consumer inflation inched up for the first time in around a year, keeping pressure on the central bank as officials mull further interest rate hikes.

But the inflation figure remains moderate compared with last year's numbers.

MOSCOW — In central Moscow, retired businessman Igor Inkin is preparing to turn down simple pleasures like dessert as the value of the ruble in his pocket continues to slide.

At 63 years old, he has seen the highs and lows of Russia's turbulent economy, but 17 months into the Kremlin's Ukraine offensive, Inkin is concerned about how to make ends meet.

The ruble has been trading around 97 against the dollar in recent days — its lowest level since March 2022, weeks after Moscow unleashed full-scale hostilities in Ukraine.

"Prices in the shops are going up and we're having to adjust our expenditures. It's very unsettling," Inkin told AFP.

"We are denying ourselves many, many things... sweets and so on."

Coupled with a year-and-a-half of unprecedented Western sanctions and a sharp drop in oil revenues, Russians are starting to feel the pinch.

Inflation has been on the rise since spring, forcing the central bank to hike its key rate to a greater-than-expected 8.5 per cent to rein in prices. 

"The situation with the ruble is especially worrying for us pensioners," Inkin said. 

For young Russians, who now face the kind of isolation their Soviet peers remember, the outlook is bleak.

President Vladimir Putin insists Moscow will weather the storm, presenting it as a historic opportunity to bolster Russia's domestic businesses and create jobs for the country's youth.

Many Muscovites echoed Putin's hope that isolation from the West would lead to a renaissance for Russian-made companies and businesses.

But, far from what is shown on Kremlin-controlled television screens, many are struggling.

Dmitry Bobrov, a 19-year-old freelance IT fixer and bicycle courier, cannot always afford spare computer parts.

"Video cards, processors... after the ruble fell their prices have gone up a lot," he said, weighed down by a large courier bag.

Western sanctions have made it harder for Russian businesses to buy goods and parts from abroad, forcing them to rely on parallel imports — goods transported via another country.

The United Kingdom on Tuesday introduced new sanctions targeting Russia's access to military equipment, adding to a long list of restrictions designed to isolate the country.

"The special military operation is also having a big impact, I think," Bobrov said, using the Kremlin term for its offensive in Ukraine. 

Around him, billboards of Western brands have largely disappeared, replaced by huge portraits of Russian soldiers.

While many Russians appear publicly stoic and receptive to the Kremlin's narrative, data show they are increasingly worried about their livelihoods.

Fearing for their savings, Russians withdrew 1 billion rubles in cash ($10.3 million) in the three days after the Wagner mercenary group staged a mutiny, according to central bank figures.

The number is some five times higher than the average of a normal three-day period in Russia.

Sofya Donets, chief economist for Russia at Renaissance Capital, said the weakening of the ruble presented no risk to the country's financial stability.

Analyst Arnaud Dubien meanwhile said the drop in the rouble was expected, reflecting the country's foreign trade.

What is not expected, he said, is that "the ruble is weakening even as the price of oil increases again". The Russian economy relies heavily on oil and gas exports.

He warned that the government must be careful not to let the ruble slip past 100 dollars to 1 ruble.

"This could fuel speculation in society that the country has fallen by the wayside," he added.

Fyodor Tikhonov, a 37-year-old working in the film industry, said putting food on the table for his family has become far pricier. 

He used to be able to buy dinner in the supermarket for around 1,000 rubles ($10).

"Now, it's minimum 2,000," the video editor said as he took his son to the shop. 

"This cannot go on forever," he said.

MILAN — Italy's right-wing government has unveiled a surprise 40 per cent windfall tax on "surplus profits" generated by the rise in interest rates, sending shares in the country's banks plunging on Tuesday.

Prime Minister Giorgia Meloni's ministers agreed the move at a cabinet meeting late Monday, vowing to invest the funds raised into helping households and businesses struggling with the cost of borrowing.

Deputy Prime Minister Matteo Salvini told reporters the tax would be levied on banks' "surplus profits" generated by the European Central Bank's (ECB's) interest rate hikes.

The hikes by the ECB — the central bank for the 20 countries that use the euro, including Italy — has boosted banks' profits by "billions", he said, but increased costs for their customers.

The government was "using part of the banks' billion-dollar profits to help families and businesses affected by rising interest rates", Salvini added on X, formerly known as Twitter. 

Shares in Italian banks plunged on the news, which neither the sector nor analysts had expected. 

Around 1:00pm (1100 GMT), shares in the two biggest Italian banks, Intesa Sanpaolo and Unicredit, fell 8.6 per cent and seven per cent respectively. 

Shares in Monte dei Paschi di Siena fell by 10.2 per cent, Bper Banca by 10 per cent and Banco Bpm by 8 per cent.

One year 

Analysts at Banca Akros said the market was responding negatively to "this unexpected bad news", estimating that banks' earnings per share would fall by an average of 7 per cent. 

The new levy will focus on the 2022 or 2023 financial years, a governmental source told AFP.

Foreign Minister Antonio Tajani told the Corriere della Sera newspaper it would "only last one year".

"We have been saying for months that the ECB was mistaken in raising interest rates, and this is the inevitable consequence," he said.

"It is not a measure against them [the banks], but a measure to protect families" and those struggling to pay mortgages, he insisted.

Meloni is thus using the tax to raise funds for the draft budget for 2024, after a surprise 0.3 per cent decline in gross domestic product (GDP) in the second quarter of 2023.

The new levy could bring in more than 2 billion euros, according to initial estimates quoted in the Italian media.

Soaring profits

Italian banks, like their European counterparts, saw their net interest income soar in the wake of the rise in interest rates.

Intesa Sanpaolo saw its net profit jump 80 per cent to 4.2 billion euros in the first half, while UniCredit posted a half-yearly net profit of 4.4 billion euros.

Spain's left-wing government has also introduced a similar tax on banks scheduled for 2023 and 2024, drawing criticism from the ECB.

Salvini, whose far-right League Party is a junior coalition partner to Meloni's far-right Brothers of Italy, said the levy was "common sense".

The CISL trade union said it was a "fair" measure that should be extended to multinational companies in the energy, digital or even logistics sectors.

But Francesco Galietti, from the Policy Sonar consultancy, said it was a "hugely controversial tax", also describing it as a "typical populist move". 

Parliament now has two months to convert the Cabinet's decree into law, during which time it can be significantly changed.