The main issue of the credit crunch era has been the banks and the financial sector. This started with some collapses and continued with so many countries adopting the TBTF or Too Big To Fail strategy where the taxpayer bailed them out. However one country followed a different route and did not bail out its banks but they mostly continued none the less and this country was Italy. You see whilst Ireland was spending 31% of its Gross Domestic Product on bailing out its banking sector in 2008-14, Greece 22% and Germany 8% the Italian Treasury in total received 0.1%! Thank you to Professor Gianfranco Di Vaio for the numbers which cover 2008-14.
So Italy had no banking problems and no bailout was required or perhaps it let them fall like Iceland? No neither was the case. Back in January 2012 I was on the business program of Sky News explaining the problems besetting Unicredit back then.
During his interview on Jeff Randall Live on Sky News yesterday, Mindful Money’s Shaun Richards highlighted two main problems facing UniCredit: “These are its holdings of Italian government bonds ( and indeed other sovereign bonds) where prices have fallen heavily (over the last year or so the benchmark Italian ten-year bond yield has risen from 4% to 6.93%). And also that lending in foreign currencies to individuals and businesses in other nations, particularly in Hungary. ( From Economics Guy).
Problems with a rights issue had led to a suspension of Unicredit’s shares something which has been an incredibly familiar event since then for quite a few of the Italian banks. Actually that may happen again today because as I type this the major Italian banks have seen their share prices fall by 4.1% pulling the Milan market some 1.6% down in response. If we look at the problems then the “sovereign doom loop” was in play because the Italian banks have consistently been large holders of Italian government bonds but the price of them was falling sharply. You may well be thinking as I am here that the relationship between the Italian banks and the government is one of you scratch my back and I will scratch yours. What is Italian for Sir Humphrey Appleby? Also the lending in foreign currencies was something which had always been a hand grenade that was primed to explode and it had.
Why did Italy not bail out its banks?
I note that Italian observers feel that there was an element of national pride here. Personally I see the issue more prosaically as Italy was already in a position where it had a relatively large national debt. This was a consequence as regular readers of my work will know of the fact that it barely managed much economic growth even in the good years. So the bad times that followed saw its national debt rise and in fact in the database quoted above from 2008-14 its national debt rose by 32% of GDP. These days it is of the order of 130% on that measure so we can see that a banking bailout would have made it look rather like Greece.
These have been an ongoing and building issue for the Italian banks under the title of Non Performing Loans or NPLs. Last week Governor Visco of the Bank of Italy gave us an official denial of trouble by telling us the problems were “somewhat overstated” Trouble is he then had to provide some numbers!
First, at 18 per cent of total loans on a gross basis as of December 2015, Italian banks’ NPLs – whose value, net of provisions, is around €200bn – are certainly sizeable.
Presumably his own number is not overstated. I will leave it to readers to wonder about the valuations against this on this ” real estate collateral, in particular, amounts to approximately €160bn.” and what this means in practice “other personal guarantees (€37bn)”. After all it is apparently all covered which makes us wonder why this is an issue.
Second, the deterioration in credit quality, a legacy of the deep and prolonged recession, has been recently abating.
Oh and he does not expect the flow of more bad loans to stop but merely to slow down.
The rate of new bad loans is projected to decline further this year.
This is the new Italian bad bank and Governor Visco describes it thus.
The fund has raised resources (more than €4bn) from Italian and foreign investors (banks, insurance companies and other institutional investors).
There is a problem here as if everything in the garden is as rosy as we are told why is it necessary? On the other side of the coin some 4.25 billion looks a bit thin when compared to 200 billion! It may not even cover this year’s increase in NPLs. As Atlante translates to Atlas you see that on that score it may have some trouble in stopping the sky from falling especially as some 1.5 billion Euros has already been spent propping up Banca Vincenza. Oh and in a reminder of a familiar issue this helped out Unicredit which was being sucked into that particular piece of quicksand.
Actually the fund is in danger of fast disappearing as Banco Popolare is in the queue and I note today that Creval wants to pass on some of its “assets” to it. Oh and Banco Popolare is in the news this morning. From Reuters.
Shares in Banco Popolare fell sharply on Wednesday after the Italian bank reported last night a surprise first quarter loss due to loan writedowns.
Surprise? it is always a “surprise” to the “experts” is it not?
Bloomberg last month pointed out that there were other reasons to worry about the Italian banks. I have already made the point about their holdings of sovereign debt but there is also this.
Italian banks also hold more than double the euro-area average of bank bonds, a self-reinforcing risk, as the bank sector’s current troubles add to the risk of such securities.
Remember the Atlante fund is also financed by the other banks so trouble for one can easily lead to a domino effect for the next weakest and of course weakens the whole.
This has been a type of bailout for the Italian banks and the 117.8 billion Euros the ECB (European Central Bank) has driven prices higher and yields lower giving quite a windfall to the holdings of the Italian banks. Actually they may not even sell them as officially they have a zero risk rating. ECB President Mario Draghi must have been very pleased at this side-effect of QE as on his CV is the issue that not only was he Governor of the Bank of Italy he had previously been in charge of bank supervision.
There have been suggestions that companies could take advantage of the new Corporate Bond QE to issue bonds very cheaply and then to buy an Italian bank. Lorcan Roche Kelly rather amusingly offered his Irish farm as collateral in such a deal but so far he is as far as I can gather alone.
Some things Italian are in fine fettle as for example the stock of football manager Claudio Ranieri could hardly be much higher. However the Italian banks lack a man of such charm.charisma and skill and this is a shame as returning them to health is a job on the scale of getting Leicester City to win the English football premiership. Trouble is 5000-1 odds are proven wrong not that often!
I expect the ECB and Mario Draghi in particular to find new ways of helping the Italian banks but where is any incentive for them to reform? Also in my view they are at the heart of the problem that is the lack of Italian economic growth. It is this link that is the real “doom loop” in my view where the banks do not support the economy and in return its weakness sucks them into a world of NPLs. That loop is still spinning around.
Meanwhile Banco Popolare seems to be making some noise today.
Italy’s Banco Popolare halted down -10.41% ( h/t @insidegame)