With the European Central Bank trimming purchases of euro zone government bonds, Italy is keen that its citizens, especially wealthy ones, help it refinance the world's fourth-largest public debt pile as a share of output.
More domestic ownership of Rome's debt, whose sustainability is seen as crucial for the euro zone's survival, could increase its resilience to shocks as small savers are less likely to panic in a crisis.
But the blow to their wealth could reverberate more in the Italian economy, where small companies, which are the majority, struggle to find cash to grow.
With Italy's already undersized public equity market shrinking further and alternative investments only an option for the wealthy, listing advisers said the Treasury's retail funding policy is diverting capital away from businesses.
"Governments face tricky choices and they have, so to speak, to pick their poison," said Alberto Martin, senior researcher at Barcelona's Centre de Recerca en Economia Internacional, stressing there were downsides, too, to domestic debt ownership.
Higher interest rates have rekindled Italians' love affair with their 2.4 trillion euro ($2.6 trillion) government bond market, which benefits from a tax rate that is less than half that on other financial investments, or even bank deposits.
TAX INCENTIVES
To keep demand going, after households and businesses grew their government bond portfolios to a euro-era high by adding 140 billion euros in the 12 months through October, Rome is planning further tax incentives.
Italy intends to render effective, in time for a new retail bond sale in late February, measures to allow savers to take up to 50,000 euros ($54,000) worth of government bonds out of a wealth index the state uses to assess eligibility for welfare benefits, government sources said.
The Treasury in 2023 issued 44 billion euros in bonds for retail investors, who hold 13.5% of its debt, more than double the level of mid-2022.
"Bonds dedicated to retail investors have been an enormous success in 2023," UniCredit Head of Strategy Research Luca Cazzulani said.
To fund purchases, savers mostly used cash in bank deposits, but also sold mutual funds and insurance products, he said.
Italian banks lost 56 billion euros in household deposits in the year through November and stock market trading volumes on mid-sized companies halved, prompting calls from finance professionals for government action.
Italy's Treasury has promised new measures to channel private savings to support companies' investment needs, but has been scant on details.
SPURRING INVESTMENTS
A scheme to pour more of Italian households' 5 trillion euros in financial wealth into small businesses suffered 2.5-2.6 billion euros of outflows in 2023, broker Equita calculated, as a five-year term passed, allowing divestment while retaining tax breaks.
Giulio Centemero, a politician in Prime Minister Giorgia Meloni's coalition, told Reuters he had proposed new tax breaks to stem redemptions and encourage new investments.
He also proposed retaining a tax incentive to prod smaller business to list.
To boost listings, Rome will approve in February measures such as ways to strengthen the influence of longstanding shareholders. However, the plan has angered large international funds which make up 90% of investors in Italian equities.
International investors drove Milan's blue-chip index up 28% (.FTMIB) in 2023, while domestic divestment pushed the index for mid- and small-capitalisation companies down 17%.
"The growing share of savings poured into government bonds drained liquidity away from the bourse, especially small- and mid-caps," said Lukas Plattner, a partner at law firm ADVANT Nctm, taking aim at the Treasury's "aggressive" policy.
In 2022, Italian public equities totalled 34% of output, down from 51% in 2006, and compared with Germany's 45% and France's over 120%.
Private markets in Italy account for only 3-4% of wealth, against an ideal allocation of at least 20%, said Claudio Scardovi, a Deloitte senior partner and professor at Milan's SDA Bocconi School of Management.
"An apparent zero" risk on government bonds, and yields which are attractive in nominal terms but less so net of inflation, divert "most savings away from real assets, preventing that cash from flowing into the economy," Scardovi said.
Capital struggles to find the best use, he added.
"The state's decision-making process is partly influenced by consensus-building, not just the need to find the most productive and profitable investment."
($1 = 0.9229 euros)
