If the Italian economy is to recover then genuine banking reform is needed

A theme of this website is the way that the Italian economy and its banks are trapped in what is at best stalemate and as often as not weakens each other. This has over time led to a situation where we see that the Italian economy has stagnated in the Euro area and in fact has shrunk if we look at GDP (Gross Domestic Product) per capita. In other words the individual experience in terms of the ordinary person has been of an economic depression. Chilling when it is put like that isn’t it? Project Syndicate take us from the aggregate position to the individual one.

Italian real (inflation-adjusted) GDP growth has suffered, averaging just 0.3% per year from 1999 to 2015.

But in spite of Italians leaving the population has grown over the same period meaning that per person output has fallen.

as many as 1.5 million young Italians have left the country, with 90,000 departing in 2014 alone. Meanwhile, five million foreign immigrants have arrived, constituting 8.3% of all residents (and not including undocumented immigrants).

Those who proclaim that immigration is an economic success get plenty of food for thought from the experience of Italy.

There has been a period where some on Twitter have been proclaiming that Italy has been on the cusp of an economic renaissance but this has turned into this as @Livesquawk reported at the end of last month.

Italy PM Renzi says cabinet approve economic forecasts; 2016 GDP forecasts cut to 0.8% (prev. 1.2%), 2017 GDP forecast 1.0% (prev. 1.4%)

As you can see it has turned into a case of “meet the new boss, same as the old boss”. Or as Project Syndicate puts it.

Two years later, far less change than expected has materialized, and Renzi has come to resemble a guarantor of political stability more than a rottamatore – a “scraper of the old,” as he had been nicknamed.

That makes him resemble Shinzo Abe in Japan.

Foreign banks are cutting back

A theme that does not always get the airing it should is that many banks are cutting back on business overseas. The last 24 hours have seen that at play in the banking sector of Italy.

Barclays has today agreed to sell a portfolio of salary secured loans, worth around £260m, in Italy to IBL Banca………Although the bank continues to run investment and corporate banking in Italy, it shed its retail banking network in August.

Those with a wry sense of humour and knowledge of the market timing skills of UK banks may see this as hope for Italy! But Barclays is not alone in retrenching.

BNP Paribas plans to cut 5 percent of the workforce at its BNL Italian business and close more than 10 percent of its branches there…….BNL would cut 700 jobs and close 100 branches under its new business plan to 2020

Again maybe there is some hope as we note that BNP might be a reverse indicator.

BNP Paribas paid 9 billion euros to acquire control of Banca Nazionale del Lavoro (BNL) in 2006 and had to revive the Italian bank from years of underinvestment.

However the theme here is of foreign banks pulling out of the Italian market as we note also that only marginally but the NPL (Non Performing Loan) issue is getting worse again.

Gross bad debts at Italian banks rose to 200.106 billion euros ($224 billion) in August from 198.252 billion euros the month before, though the rate of growth slowed, the Bank of Italy said on Tuesday…..The central bank said gross bad loans increased a yearly 0.1 percent in August compared to a year-on-year rise of 0.3 percent in July.

Presumably this is not what the Governor of the Bank of Italy meant when he told us this at the end of May. From Bloomberg.

 

Italy Bank Non-Performing Loans at Turning Point, Visco Says

Monte dei Paschi de Siena

BMPS was the subject of a private-sector rescue plan but sadly for it that hit stormy waters as its share price fell. It was a response to the Euro area banking stress tests where under one scenario it had capital of -2.44%. According to Euro money this was the plan.

The ambitious deal moves nearly €10 billion of NPLs off-balance sheet and pours another €5 billion of capital into MPS’s coffers. This should increase its CET1 to 11.4% and reduce its NPL ratio from the current eye-watering 34% to around 18%.

This was presented as a triumph and we were told this by the CEO, “We don’t have a plan B; this is our plan,”. Actually there have been several new plans since then usually announced late on a Friday and I guess the new CEO is not bound by the old one. Although as this from Reuters yesterday tells us some of it still exists.

Italian bank bailout fund Atlante confirmed on Wednesday a commitment to invest up to 1.6 billion euros ($1.8 billion) in the planned securitisation of bad loans at ailing bank Monte dei Paschi’s.

I will come to Atlante another time in its various guises as it sees ever more demands on its funds and those who back it are no doubt hopeful that this is true “due diligence of the soured debts had been completed and had confirmed the initial price estimates”.

This morning the story has developed as we have got an official denial and we know what to make of those! From Italy Europe24

Meanwhile the Italian government has taken a new stance on the bank: “Public support measures for MPS are not being envisaged, let alone nationalization,” said Economy Minister Pier Carlo Padoan during question time in the Italian Parliament.
“Any talk of a bail-in is therefore just unfounded speculation,” he said.

Unicredit

This has done better this morning as it has managed this according to the Financial Times.

UniCredit has raised €550m overnight through the sale of a 20 per cent stake in its online bank Fineco, the latest asset sales as Italy’s largest bank by assets seeks to boost laggard capital ratios.

In itself Unicredit needs the cash so it can improve its capital ratios but this sort of action has a consequence as you have to sell-off your better businesses leaving you worse off aftrwards.

Nonetheless, bankers say UniCredit’s sales of its most profitable assets will leave the bank’s return on equity severely weakened posing a knock on problem.

So tactically good but strategically bad seems to be the summary here.

Comment

What is extraordinary about the Italian economy is the way that the expansionary monetary policy of the ECB has helped it so little. A deposit rate of -0.4% and the 80 billion Euros a month of QE bond purchases as well as a lower overall exchange-rate for the Euro seem to have been like a shower in a desert. To this we can add the economic benefits of a lower oil price. Some of these gains are hard to quantify but will have been at play and may be reinforced a little going forwards by the fact that the Euro has dipped below 1.10 versus a strong US Dollar this morning. On the tangible side we have the 176 billion Euros of Italian bond purchases by the ECB which have boosted the economy via the public finances.

Meanwhile the doom loop between the Italian banks and the overall economy just carries on. The banks are happy to invest in Italian government bonds and of course profits have been available there via the ECB. But that is quite different to lending to help companies and businesses as the IMF put it in July.

Alongside anemic demand, impaired balance sheets have weighed down credit growth and the economic recovery

Another issue is related to the high unemployment rate in Italy which is 11.4% and this raises the issue of female participation in the labour force. From the IMF.

Low female labor force participation in Italy is not necessarily the result of unconstrained choice……In 2014, the difference between male and female participation rates was more than 20 percentage points, surpassed only by Malta.

There are many ways of viewing this but on today’s topic it does limit the Italian economy.

 

 

 
Advertisements

15 thoughts on “If the Italian economy is to recover then genuine banking reform is needed

  1. So, let me get this straight:
    1. Italians are poorer now individually than fifteen years ago;
    2. Its banks are bust;
    3. It cannot devalue;
    4. 1.5 million Italians, no doubt young and energetic, have left, worsening the demographics;
    5. The debt, as ever, is artificially inexpensive;
    6. Restructuring hasn’t happened, either for the banks or the economy.
    And yet, the Euro remains sacrosanct.
    At what point do you think people will start to think that maybe, just maybe, the Euro hasn’t benefited Italy?

    • Points 2 and 6 were intact when Italy still had the lira in spite of it having the ability to devalue at that time whilst point 5 (artificially inexpensive debt) is actually helping the Italian Government keep going, which it may not have been able to achieve if it retained the lira. Careful what you wish for.

  2. What is extraordinary about the Italian economy is the way that the expansionary monetary policy of the ECB has helped it so little

    Sorry Shaun , but who’s economy did it help ? Germany ? did it need any help ?

    Forbin

    • Hi Forbin

      I could have written that sentence much better so let me try again. Italy is one of the economies that should in theory have benefited from all the monetary easing and yet it has not. A bit like Portugal in many ways.

      Meanwhile the boost from lower oil prices is fading away as they drift higher with Brent Crude Oil now US $52.

  3. ‘as many as 1.5 million young Italians have left the country, with 90,000 departing in 2014 alone. Meanwhile, five million foreign immigrants have arrived, constituting 8.3% of all residents (and not including undocumented immigrants).’

    Wow………..incredible.Utterly incredible.

    ‘What is extraordinary about the Italian economy is the way that the expansionary monetary policy of the ECB has helped it so little.’

    But it’s likely helped keep a number of German banks solvent.

    • Hi Dutch

      The immigration point resonated as for example Johnathan Portes is regularly to be found saying they are an economic benefit. But the case is not as open and shut as that if you look at Italy.

      The precious must be protected at all times.

  4. You ain’t a gonna go nowhere

    It’s no use trying to get Italians, (or Greeks for that matter) to be Germans, or Franco-Germans; there is a totally different mindset, neither better nor worse, just different.
    Face it, even without Brexit, the EU is doomed.

  5. Hi Shaun, It rather look as if the changes you are describing are the beginnings of banking reform in the sense that foreign banks are pulling out leaving the Italians to get on with it on their own.

    The foreign banks may have read the IMF’s recommendations re the urgent need for Italian banking reform and are getting out fast before they get burned by reform (if the Italian Government decides to heed the IMF’s recommendations) or before the Italian banking industry capsizes taking foreign bank interests with it in the absence of reform..

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s