(Adds details, analyst’s estimates)
By Giuseppe Fonte
ROME, Oct 4 (Reuters) - Italy is considering reducing tax benefits for the country’s lenders as part of measures to fund next year’s budget, a government source said on Thursday.
Confirming a report in Il Sole 24 Ore daily, the source said the government could reduce the amount of interest payments and writedowns that banks can deduct from their taxable income.
Italy’s anti-establishment government is struggling to finance a number of expensive electoral promises which it wants to include in next year’s budget.
If the changes went through, banks would only be able to deduct 85 percent of interest payments from their tax base and would have to spread losses stemming from the newly introduced IFRS9 accounting rule over a period of two to 10 years, Il Sole reported.
Giovanni Razzoli, an analyst at broker Equita SIM, said he expected a muted impact on banks’ earnings from the outlined measures, adding this was already priced in by the market, where Italian banks trade at a deep discount to the value of their assets.
Razzoli estimated a 4 percent hit to earnings and an average capital erosion of 6 basis points.
The head of Italian banking association ABI said increasing the tax pressure on banks risked weakening the economy as lenders could become less able to support businesses.
But Industry Minister Luigi Di Maio, the leader of the populist 5-Star Movement, said it was “sacrosanct ... to strip bankers of some of their privileges.”
“If a good economic performance hinged on bankers’ privileges, we would be in the Land of Plenty by now given all the money the sector got from previous governments. Things are going to change,” he said in a Facebook post.
Italy’s previous centre-left government passed several measures to help the banking sector recover after a deep recession, culminating in the state bailout of the country’s third-largest bank Monte dei Paschi in 2017.
The 5-Star Movement rode popular anger at a string of bank failures in recent years that have left thousands of Italian who held their local lenders’ bonds and stocks out of pocket.
Italian banks are large holders of the country’s debt and have been badly hit by market turmoil over Italian bonds.
The source also confirmed that the government was considering scrapping tax incentives introduced by the previous executive to spur companies’ capital levels, known as ‘Allowance for Corporate Equity’ or ACE. (Reporting by Giuseppe Fonte; Writing by Valentina Za; Editing by Giselda Vagnoni)