A stress test for the economy of Italy would also show deep seated problems

Yesterday saw the publication of the latest stress tests for the Euro area and whilst as I discussed then there is a strong element of public relations about the whole operation there were some revealing results. For example if you think that the major purpose here is indeed PR then there is something troubling about the headline below from the Financial Times.

Italy under pressure as nine banks fail stress tests

Not much good PR there for la bella Italia is there? Of the initial list of 25 failures Italy provided nine which is way beyond its supposed 18% share of Euro area economic activity. Even if we move forwards to the banks who still need to take action – others had raised extra capital in the meantime – we see that out of 13 still with shortfalls four were Italian. Regular readers of my updates will not be surprised to see Banca Monte dei Paschi di Siena on the list and it was accompanied by Banca Carige Banca Popolare di Milano and Banca Popolare di Vicenza.

The Financial Market Response

Whilst the Euro has edged slightly higher to 1.269 versus the US Dollar there has been a rather different impact amongst the Italian banks. Monte Paschi has fallen 15% and seen its price suspended and Banca Carige is down 17%. Not the best scenario to start a capital raising effort to say the least! Mind you shareholders in Monte Paschi will be familiar with it being limit down although they may be wondering about the veracity of the rumours which had it limit up late last week.

The Bank of Italy is unhappy with the results

You might think that a national central bank would be in tune with the overall ECB policy but something of a critique of the process has emerged from the Bank of Italy.

For Italy, the scenario proved very unfavourable because it assumed a deep recession for the entire period 2014-16, coming after the one already suffered by the Italian economy in 2012-13, which in turn followed that of 2008-09. It also assumed a resurgence of the sovereign debt crisis.

Whilst the scenario might have been unfavourable it was not unfair as the economic struggles of Italy are indeed ongoing. Even in the better years pre credit crunch it only averaged economic growth of around 1% per annum and since then it has got worse. The Bank of Italy has often predicted improvements which have so far not come. As to the dangers of a sovereign debt crisis what could go wrong in a country with a national debt around 130% of its annual economic output?

The Bank of Italy also points out that allowing for capital raising in place the amounts required shrink considerably.

the potential capital shortfalls concern four banks, for the lower amount of €3.3 billion.

It also feels able to indulge in hype and indeed perhaps in some humour.

The results confirm the overall resilience of the Italian banking system

Also it may have been best not to draw attention to this.

Taking account of these measures the potential shortfalls are reduced from €3.3 billion to €2.9 billion  and concern two banks: Banca Carige and Banca Monte dei Paschi di Siena, which have been under scrutiny by the Bank of Italy for some time.

Reports that Monte Paschi is fine have invariably been followed by a requirement for yet more capital. Back in January 2013 the Governor of the Bank of Italy assured viewers on CNBC that there was “no question that the bank is stable” yet more than a year and a half later doubts continue to emerge.

Italy’s banks have received only small bailouts

The Bank of Italy is keen to express this point.

the banking and financial systems of various euro-area countries have benefited in recent years from substantial State aid: nearly €250 billion in Germany, almost €60 billion in Spain, around €50 billion in Ireland and the Netherlands, just over €40 billion in Greece, around €19 billion in Belgium and Austria, and nearly €18 billion in Portugal. In Italy State aid amounted to approximately €4 billion.

There are two issues here which is that with the size of its national debt there is a clear incentive for Italy to avoid bailouts of its banks. Feeding into this has been a mechanism going th eother way where Italian banks have been purchasers of sovereign bonds

You’re an embarrassment

With apologies to Madness there is an issue of Italy’s banks being rather singled out here. If they are in trouble then one might reasonably look at what the Bank of Italy was up to on the monitoring and supervisory front. The problem with that is that the current President of the European Central Bank Mario Draghi was Governor of the Bank of Italy from January 2006 to October 2011. Perhaps he could summon himself to his own office to explain events. Ooops!

What about the Italian economy?

Whilst all this is happening one has to question what sort of role Italy’s banks can play in its economy. Also it is hard to avoid the thought that the travails of Italy’s banking sector have contributed to its economic malaise. Today has seen the release of numbers for the overall Euro area and they are bad enough but when you consider that most countries are doing better than Italy it sends a chill down the spine.

the annual growth rate of credit extended to the private sector stood at 1.8% in September, compared with 1.9% in the previous month. Among the components of credit to the private sector, the annual growth rate of loans was less negative at 1.2% in September from 1.5% in the previous month.

So in spite of an enormous effort by the ECB the issue of bank lending and credit continues to disappoint.

The latest economic data

On Friday we received a familiar disappointing message.

In August 2014 the seasonally adjusted retail trade index decreased by 0.1% with respect to July 2014 (-0.1% for food goods and -0.2 for non food goods). The average of the last three months compared to the previous three months decreased by 0.6.

The unadjusted index decreased by 3.1% with respect to August 2013.

If we look forwards there seems to be a lack of cheer too.

In October the confidence climate index decreased slightly from 101.9 to 101.4……All the components decreased: economic from 105.4 to 101.3, personal from 101.5 to 100.7, current from 102.6 to 100.6, future from 102.7 to 101.7.

When you consider the problems that Italy has in this area then a weakening of its expected future is not what is either hoped for or required. Even the Bank of Italy’s Monthly Bulletin is losing its optimism.

Italy’s economy has begun to weaken again…….According to our estimates, there was a further, slight decline of GDP in the third quarter.


There is a certain irony in a downbeat Bank of Italy criticising the ECB for a downbeat assessment of Italy I think. But perhaps the best perspective is to look at Italy’s troubled economic record which has lasted now for this century which of course is also pretty much its period of Euro membership. Whilst an improvement in the supply of bank credit would help with that there is of course the question as to what the demand for bank credit in Italy is? Maybe there is not a flood of pent-up demand at all.

Adding to the issues comes the problems over the budget deficit with yet more promises being made by the Renzi government over future austerity this morning. I continue to hope that Italy may find a way to mobilise at least some of its black economy but as it stands there seems to be considerable barriers to what it needs most which is reform and change. It is all so sad for what is a beautiful country.


10 thoughts on “A stress test for the economy of Italy would also show deep seated problems

  1. Hiello Shaun, I have just read yesterday and today’s post and agree the sentiment entirely. I find it nothing short of amazing that no Spanish banks were included in the list given the size of the property crash. Have they somehow spirited away all the bad debts? I also wonder about the valuation of bank owned housing stock but there again it is usually the banks who value properties in Spain so they might just have a vested interest in keeping the supposed value high.

    On a slightly different tack; I am surprised that the value of the Euro hasn’t sunk further given the endless bad news out of the Euro zone. I could understand why it held up when Germany was doing well (ersatz DM and all that) but now that Germany has slowed? It is the one thing that locals here would like to happen to boost tourism and yet the Euro remains quite resilient.

    • I think they may have just offloaded them to taxpayers Pavlaki.

      Alternatively,they’ve always been pretty skilled at hiding the bad news.

    • In Spain you can’t just hand over the keys to the lender and walk away, they pursue you for the money.
      This has stopped property prices plummeting further, and has probably saved the Spanish banks, although I’d bet that the TROIKA doing the tests were, Hear-no-evil, See-no-evil & Speak-no-evil.

    • Hi Pavlaki

      You may enjoy this from the Governor of the Bank of Spain.

      “the outcome of the Comprehensive Assessment highlights the fact that the
      reform and restructuring of the Spanish banking system in recent years has borne fruit, and that Spanish banks now face the future with healthy balance sheets and a sound solvency position.”

      “To sum up, between 1 January 2008 and 30 June 2014 the provisioning drive by Spanish banks amounted to €277.65 billion, that is to say, provisions amounting to the equivalent of 25% of Spain’s GDP in 2013”

      So there you have the official view anyway!

  2. Hi Shaun

    For Italy, the scenario proved very unfavourable because it assumed a deep recession for the entire period 2014-16, coming after the one already suffered by the Italian economy in 2012-13, which in turn followed that of 2008-09.

    Is this one of those “lost decades” that I’ve read so much about, or maybe a “triple-dip”? Whatever we call it, it sure don’t look good, does it?

    Pavlaki raises two points that puzzle me too (even more than Economics usually puzzles me). Spanish banks on the one hand and the gravity-defying value of the Euro on the other.

    Best check on my popcorn reserves … this could be a long winter, and not just for the good folk of Italy.

    • Hi Jim M

      In answer to your “lost decade” question Italy is now into its second decade of it and it tells a very grim tale in my view. As it happens it may yet be a triple-dip and indeed will be if the Bank of Italy is correct about the third quarter of 2014.

      So far winter seems to be missing in action at least in London, but I guess there is plenty of time for it to catch up for lost time!

  3. Hello Shaun ,

    Sorry I missed yesterdays post but it seems we’re still at ground hog day ?

    If we were Rip Van Winkle and fell asleep just after the Bankers Crisis of 2008 and woke today , would we think nothing much has changed?

    Apart from the QE debt mountain that is ……

    Its amazing how calm everything is , like a ship a drift in the eye of the storm …..

    Or more likely the Titanic , the “night to remember ” British version and not that trashy American poor quality version …….

    good job Italy wasn’t asked for more cash to support the US of Europe unlike Greece , ahem ..

    Decline again ? wut ?? not even the “Gerry Mander” ing of the ESAt could not fix? Perhaps they need to lend to Rome’s hookers and druggies to get the “eceonmy” going again !!


    PS: the Baltic Dry ticked upwards a bit but we’re still 47% down on last year
    and WTI still holding just below $80 – is that cheap? Call me when its $20 😉

    • Hi Forbin

      Well oil is cheaper than we had got used to although we have seen another bear rally late today- mind you only to US $85.50 for Brent Crude- . I guess we will see more of those as we are in the zone where at least some of the frackers are looking hard at their margins.

      As to the Baltic Dry it has decoupled from the Harpex (container shipping) which makes things hard to read.It has edged higher in 2014 to 422. Although this is way way below the past peak of 1839 it does give a conflicting message. Although of course that is normal for the credit crunch era isn’t it?

  4. Hi Shaun, this might be worth digging out. Looks like Italy is about to “show your workings”. From the Economist:

    “In an act of studied contempt, Mr Renzi’s government published online the Commission’s “strictly confidential” letter demanding an explanation for Italy’s draft 2015 budget…

    Mr Renzi said he wanted greater transparency and would, in future, be publishing not just the Commission’s letters, “but all the financial data on how much is spent in these buildings. It’ll be a lot of fun.”…”

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