Italy faces yet more economic hard times

This morning has brought more signs of the economic malaise that is affecting Italy, a subject which just goes on and on and on. Here is the statistics office.

In 2019, GDP is expected to increase by 0.2 percent in real terms. The domestic demand will provide a contribution of 0.8 percentage points while foreign demand will account for a positive 0.2 percentage point and inventories will provide a negative contribution (-0.8 percentage points).

That is a reduction of 0.1% on the previous forecast. In one way I doubt their forecasts are accurate to 0.1% but then in another way counting 0.1% growth is their job in Italy. The breakdown is odd though. As the net foreign demand may be small but any growth is welcome at a time of a time war but with domestic demand growing why are inventories being chopped?

So annual economic growth has gone 1.7% in 2017 and 0.8% last year and will now be 0.2% if they are correct. They do manage a little optimism for next year.

In 2020, GDP is estimated to increase by 0.6 percent in real terms driven by the contribution of domestic demand (+0.7
percentage points) associated to a positive contribution of the foreign demand (+0.1 p.p.) and a negative contribution of inventories (-0.2 p.p.).

So the main change here is that the decline in inventories slows. If we switch to a positive we are reminded that Italy’s trade position looks pretty good for these times.

In 2019, exports will increase by 1.7 percent and imports will grow by 1.3 percent, both are expected
to slighty accelerate in 2020 (+1.8% and +1.7% respectively)

Looking at domestic demand it will be supported by wages growth and by this.

Labour market conditions will improve over the forecasting period but at moderate pace. Employment
growth is expected to stabilise at 0,7 percent in 2019 and in 2020. At the same time, the rate of
unemployment will decrease at 10.0 percent in the current year and at 9.9 percent in 2020.

They mean 10% this year and 9.9% next although there is a catch with that.

The number of unemployed persons declined (-1.7%, -44 thousand in the last month); the decrease was the result of a remarkable drop among men and a light increase for women, and involved all age groups, with the exception of over 50 aged people. The unemployment rate dropped to 9.7% (-0.2 percentage points), the youth rate decreased to 27.8% (-0.7 percentage points).

As you can see the unemployment rate was already below what it is supposed to be next year so I struggle to see how that is going to boost domestic demand. Perhaps they are hoping that employment will continue to rise.

In October 2019 the estimate of employed people increased (+0.2%, +46 thousand); the employment rate rose at 59.2% (+0.1 percentage points).

The Markit PMIs

There was very little cheer to be found in the latest private-sector business survey published earlier.

The Composite Output Index* posted at 49.6 in November,
down from 50.8 in October and signalling the first decline in Italian private sector output since May. Despite this, the rate of contraction was marginal.
Underpinning the latest downturn was a marked slowdown
in service sector activity growth during November, whilst
manufacturing output recorded its sixteenth consecutive
month of contraction. The latest decrease was sharp but
eased slightly from October.

I doubt anyone is surprised by the state of play in Italian manufacturing so the issue here is the apparent downturn in the service sector. This leads to fears about December and for the current quarter as a whole. Also the official trade optimism is not found here.

Meanwhile, export sales continue to fall.

Sadly there is little solace to be found if we look at the wider Euro area.

The final eurozone PMI for November came in
slightly ahead of the earlier flash estimate but still
indicates a near-stagnant economy. The survey
data are indicating GDP growth of just 0.1% in the
fourth quarter, with manufacturing continuing to act
as a major drag. Worryingly, the service sector is
also on course for its weakest quarterly expansion
for five years, hinting strongly that the slowdown
continues to spread.

Unicredit

We have looked regularly at the Italian banking sector and its tale of woe. But this is from what is often considered its strongest bank.

After cutting a fifth of its staff and shutting a quarter of its branches in mature markets in recent years, UniCredit said it would make a further 8,000 job cuts and close 500 branches under a new plan to 2023………UniCredit’s announcement triggered anger among unions in Italy, where 5,500 layoffs and up to 450 branch closures are expected given the relative size of the network compared with franchises in Germany, Austria and central and eastern Europe.

Back in January 2012 I described Unicredit as a zombie bank on the business programme on Sky News. It has spent much if not all of the intervening period proving me right. That is in spite of the fact that ECB QE has given it large profits on its holdings of Italian government bonds. Yet someone will apparently gain.

UniCredit promised 8 billion euros ($9 billion) in dividends and share buybacks on Tuesday in a bid to revive its sickly share price, although profit at Italy’s top bank will barely grow despite plans to shed 9% of its staff.

This is quite a mess as there are all sorts of issues with the share buyback era in my opinion.  In the unlikely event of me coming to power I might rule them ultra vires as I think the ordinary shareholder is being manipulated. Beneath this is a deeper point about lack of reform in the Italian banking sector and hence its inability to support the economy. This is of course a chicken and egg situation where a weak economy faces off with a weak banking sector.

Mind you this morning Moodys have taken the opposite view.

The outlook for Italy’s banking system has changed to stable from negative as problem loans will continue to fall, while banks’ funding conditions improve and their capital holds steady, Moody’s Investors Service said in a report published today.

“We expect Italian banks’ problem loans to fall in 2020 for a fifth consecutive year,” said Fabio Iannò, VP-Senior Credit Officer at Moody’s. “However, their problem loan ratio of around 8% remains more than double the European Union average of 3%, according to European Banking Authority data. We also take into account our forecast for weak yet positive Italian GDP growth, and our stable outlook on Italy’s sovereign rating.”

What could go wrong?

Comment

There is a familiar drumbeat and indeed bass line to all of this. In the midst of it I find it really rather amazing that Moodys can take UK banks from stable to negative whilst doing the reverse for Italian ones! As we look for perspective we see that the “Euro boom” and monetary easing by the ECB saw annual economic growth of a mere 1.7% in 2017 which has faded to more or less zero now. We are back once again to the “girlfriend in a coma” theme.

Italy has strengths in that it has a solid trade position and is a net saver yet somehow this never seems to reach the GDP data. Maybe the grey economy provides an answer but year after year it fails to be measured. Of course if politico are correct there is always plenty of trade and turnover here.

Italy’s new coalition government might not last the winter, with tensions reaching a peak this week over EU bailout reform……The 5Stars oppose the planned ESM reform because they say it would make it harder for highly indebted countries, like Italy, to access bailout funds without painful public-debt restructuring.

That reminds me about fiscal policy which is the new go to in the Euro area according to ECB President Christine Lagarde, well except for Italy and Greece.

 

 

 

Will this be the final easing countdown for Europe and the ECB?

We find ourselves in the economic equivalent of the Phoney War period of the Second World War as we wait for tomorrow’s policy announcement from the European Central Bank. But it is also a period where events are moving quite quickly. Here is the IMF from yesterday.

In our July update of the World Economic Outlook we are revising downward our projection for global growth to 3.2 percent in 2019 and 3.5 percent in 2020. While this is a modest revision of 0.1 percentage points for both years relative to our projections in April, it comes on top of previous significant downward revisions.

It is not the numbers that bother me as the IMF is far from the best forecaster but the direction of travel where it has found itself revising the outlook downwards. Also there was a curious additional part to this IMF output as the quite below shows.

Financial conditions in the United States and the euro area have further eased, as the US Federal Reserve and the European Central Bank adopted a more accommodative monetary policy stance.

I think they mean are expected to do so. Ironically this came with rumours that the ECB will not act tomorrow and will instead guide us to what it will do in September.

Business Surveys

After this mornings Purchasing Managers Indices the ECB view will be more like definitely maybe on a delay. It was only yesterday that I was pointing out that France had been doing better than its peers.

Modest growth was driven by the service sector,
which posted an expansion in business activity for
the fourth month in a row. However, the rate of
increase decelerated from June and was moderate
overall. Meanwhile, manufacturing output slipped
back into contraction territory, following a first rise for
four months in June. That said, the decline was only
marginal.

So according to this survey the rate of growth is slowing in France and you will not be surprised to see what is the driving force of this.

New export business was broadly stagnant at the
start of the third quarter, with a contraction in
international sales at manufacturers broadly
offsetting a modest rise at services firms.

A few minutes later the news from Germany was also downbeat.

The health of German manufacturing went from
bad to worse in July, according to the flash PMI
data, raising the risk of the euro area’s largest
member state entering a mild technical recession.
“The performance from Germany’s goods
producers in July is the worst recorded by the
survey in seven years, with the renewed weakness
mainly stemming from an accelerated drop in
export orders – the most marked seen in over a
decade.

We have got used to weak readings for this sector in 2019 but the 43.1 for July so far was the weakest we have seen. The services sector is doing better but even it is now slowing.

Still solid growth in the service sector means that
the German economy is just about keeping its head
above water for now, but even here there are signs
of increased worries among companies as
optimism hit a three-and-a-half year low

If we sweep all that up and look at the total Euro area we were told this.

The eurozone economy relapsed in July, with the
PMI giving up the gains seen in May and June to
signal one of the weakest expansions seen over the
past six years. The pace of GDP growth looks set
to weaken from the 0.2% rate indicated for the
second quarter closer to 0.1% in the third quarter.

That will get the attention of the ECB. We know that these PMI surveys are far from always correct but central bankers like them and the ECB will be very concerned about the Euro economy continuing to slow. It will not agree with it all as we know the German Bundesbank thinks that the German economy contracted in the second quarter whereas Markit is more positive. But that means it starts from a weaker position.

Money Supply

The opening salvo here did buck the bad news trend.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 7.2% in June, unchanged from previous month.

That is better than the 6.2% with which 2019 opened and gave us another hint that it was going to be a rough first half to 2019 for the Euro area. The situation has improved in monetary terms but that has collided with the trade war.

However the wider measure was not good.

The annual growth rate of the broad monetary aggregate M3 decreased to 4.5% in June 2019 from 4.8% in May, averaging 4.7% in the three months up to June.

If we break it down we see this.

Looking at the components contributions to the annual growth rate of M3, the narrower aggregate M1 contributed 4.8 percentage points (as in the previous month),

So the slowing was in the bread money components represented by M2 and M3. Also if we look at the other components some of this is coming externally.

net external assets contributed 2.4 percentage points (as in the previous month)

I am always cautious about over analysing the components as I have seen that go very wrong in the past but it would be preferable if the growth was domestic. Especially as the ECB bank survey released yesterday suggested that credit was becoming harder to find.

According to the July 2019 bank lending survey, credit standards tightened in the second quarter of 2019 for loans to enterprises, marking the end of the net easing
period started in 2014, as concerns about the economic outlook and increased risk aversion translated into tighter internal guidelines and loan approval criteria despite
favourable funding conditions. Credit standards also tightened for consumer credit, in line with developments in the previous quarter…..

 

Comment

The situation here comes out of the deepest fears of the ECB. What I mean by that is that we have not yet had 7 full months from when the last easing programme ended. Firstly that poses deep question such as what good did it do and why can’t the Euro area grow without stimulus? But in terms of the ECB meeting and policy they are likely to be ignored. Instead it will focus on factors such as its own claim ( Mario Draghi) that the QE programme and a -0.4% deposit rate contributed 1.5% of GDP growth to the Euro area.

Also any proper credit flow relies on the banks and they continue to look thoroughly zombified. From CNBC.

German lender Deutsche Bank reported a weaker-than-expected net loss of 3.15 billion euros ($3.51 billion) for the second quarter of 2019.

Analysts polled by research firm Refinitiv had estimated a net loss of 1.7 billion euros for the period, due to the bank’s massive restructuring program announced earlier this month. The German bank itself had previously said it expected to report a net loss of 2.8 billion euros for the quarter.

The share price has fallen 4% this morning and back below 7 Euros in response to the news that things are even worse than we were told earlier this month. Next via Reuters there was this.

Italy’s biggest bank by assets UniCredit (CRDI.MI) is considering cutting around 10,000 jobs, or 10% of its global workforce, as part of a new business plan to be unveiled in December, two sources close to the matter said on Monday.

It is not my purpose today to look at those two banks individually but more to use them of examples of a banking system that is troubled if not broken. If we switch to Spain which has been the best performing of the main Euro area economies in the Euro boom I note that many of its banks have share prices hitting new lows.

Thus after all tomorrow for the ECB may yet sing along to this from Europe.

The final countdown
It’s the final countdown
The final countdown
The final countdown (final countdown)
Ohhh. It’s the final countdown

 

 

It is always about the banks or in central banker speak “The Precious”

If we look back over the credit crunch era we were told that bailing out the banks would lead us into a better future. The truth nearly a decade later in some cases ( Northern Rock in the UK) is that we see a situation where central banks have enormous balance sheets and low interest-rates dominate with the Euro area and Japan in particular having negative interest-rates. That is most odd in the Euro area as of course we have been told only this morning by the Purchasing Managers indices that growth in France and Germany is strong. So something has changed and is not quite right and if we look we see signs of trouble in the banking industry even after all the bailouts and accommodative monetary policy.

Royal Bank of Scotland

This has turned out to be the doppelgänger of the concept of the gift which keeps on giving. Each year we have had promises of recovery at RBS from whoever is in charge and each year that fades to then be replaced by the same in a so far endless cycle.  Rather like Greece actually. Also the original promise of the UK taxpayer getting their money back seems further away than ever as the price of £2.40 is less than half of what was paid back then. Quite an achievement when we see so many stock markets close to all time highs.

As to the economic effect well claims of benefits have had to face a stream of bad news of which there was more yesterday. From the BBC.

Hundreds of jobs will be lost following a decision to close almost 160 RBS and NatWest branches.

RBS blamed a “dramatic shift” in banking, with branch transactions falling 43% since 2010.

In the same period, online and mobile transactions have increased by more than 400%.

Whilst online and mobile transactions have plainly surged it is also true that all bad news is claimed as somebody else’s fault. If you have a zombie bank wallowing on then you will of course be affected by change especially in this sort of timeframe.

RBS remains still majority-owned by taxpayers following its multi-billion government bailout almost a decade ago.

If we look back to the UK motor industry bailouts were stopped because the business model no longer applied yet that critique seems to have been forgotten. I note that after of course a fair bit of economic pain the motor industry is producing record figures.

Co-op Bank

I wrote about the latest problems of this bank on the 13th of February and this morning I note we have a sort of official denial of trouble in the Financial Times.

Co-Operative Bank says “a number” of suitors have come forward since it announced plans to fin a buyer in February.

This gives rather a different picture to this from Sky News on Tuesday.

Co-op Bank bonds have been trading at little more than 80p in the pound this week, underlining investors’ pessimism that a £400m repayment due in September will be made.

Talk is cheap but apparently those bonds are not cheap enough?! Easy money if you believe the hype especially at a time of low interest-rates and yields.

But you see I warned about this back in February.

The problem in my opinion is that when a bank has trouble the record is simply that so far we have never been told the full truth at the beginning.

And note this from Sky News.

One insider said the Bank of England had hosted a meeting last week at which the Co-op Bank’s problematic pension schemes had been discussed.

The losses of £477 million last year and the announced need for £750 million should there not be a sale are hardly good portents. Back in February I feared the Bank of England might find itself stepping in and that danger has increased in the meantime.

Portugal

My eyes were drawn to this yesterday from Patricia Kowsman of the Wall Street Journal.

Portugal state-owned bank raises EUR500M carrying hefty 10.75% interest. Says 49% of buyers asset managers, 41% hedge funds. Majority in UK.

In these times an interest-rate of 10.75% is extraordinary for a state-owned bank and compares to a ten-year bond yield for Portugal that has been around 4% for a while. Why might this be so?

Also on Wednesday, a group of major international investors that suffered losses on Novo Banco’s senior bonds issued a warning to the Portuguese authorities and indicated that an agreement to minimize those losses would be beneficial to the country. The group, led by BlackRock and PIMCO, said Portugal and Portuguese banks continue to pay the Bank of Portugal’s decision to transfer obligations from the New Bank to BES ‘bad’ at the end of 2015.( Economia)

So a past bailout has caused what Taylor Swift would call “trouble,trouble, trouble” and if we return to Patricia the record of Caixa Geral de Depósitos has been very poor.

Well, it’s a state-owned bank that had a EUR1.86B loss last year, big NPLs, in a country with a v weak banking system ( NPLs are Non Performing Loans)

We find ourselves in a situation where a past bailout ( BES) have made life more difficult for a current one and the Portuguese taxpayer ends up being held over a barrel especially after the European Commission declared this.

CGD will also take actions to further strengthen its capital position from private sources

This bit raised a wry smile.

the Commission analysed the injection of €2.5 billion of new equity into CGD by Portugal and found that it generates a sufficient return that a private investor would have accepted as well.

Can they see the future now? Shall we call it forward guidance…..

Italy

Speaking of forward guidance around this time last year Finance Minister Padoan was telling us that bailouts were not going to be required for Italy’s banks and Prime Minister Renzi was telling us what a good investment the shares of Monte Paschi were. Anyway if we move to this Wednesday Reuters were reporting this.

Italy’s plans to bail out two regional banks pose a tough dilemma to European regulators, who are still considering whether Monte dei Paschi qualifies for state aid, three months after giving a preliminary green light.

Banca Popolare di Vicenza and Veneto Banca said

If they hang on long enough with Monte dei Paschi maybe something will turn up. Oh and there is Unicredit the largest bank which I called a zombie on Sky News about five years ago. It is issuing another 13 billion Euros of shares which further dilutes shareholders who of course have had to dig deep into their pockets before. Also there were plenty of rumours that it was a big recipient from the ECB TLTRO ( cheap money for banks) this week. Looking more generally Frederik Ducrozet of  Bank Pictet thought this.

Extrapolating from the share of each country in previous operations, Italy and Spain would account for at least 60% of total TLTROs holdings.

Greece

The official mantra has been along the lines of D-Ream’s “Things can only get better” and yet this happened this week. From the Bank of Greece.

On 22 March 2017 the Governing Council of the ECB did not object to an ELA-ceiling for Greek banks of €46.6 billion, up to and including Wednesday, 5 April 2017, following a request by the Bank of Greece.

The increase of €0.4 billion in the ceiling reflects developments in the liquidity situation of Greek banks, taking into account private sector deposits flows.

In a situation where we keep being told the Greek economy is improving?

Comment

This is like an economic version of the never-ending story. Proclamations of success and triumph are followed by “move along please, nothing to see here” and then well you know! In addition to the bailouts there are other schemes to help the banks. For example the cheap loans offered by the Bank of England under its Term Funding Scheme have now reached some £47.25 billion. If we move to Europe I note that Bank Pictet think this.

In aggregate, the maximum subsidy from those long-term loans at a negative rate is EUR3bn on an annual basis, compared with a total cost of the ECB’s negative deposit rate of around EUR5.5bn (a number that will grow to over EUR8bn as QE continues).

As you can see some of it is hidden or to be more precise not generally known. The biggest critique is simply the “lost decade” for the banking sector we seem trapped in and we learnt explicitly from the chief economist of the Bank of England earlier this week that different rules apply to his “Precious”. From Chris Giles of the Financial Times.

why does the chief econ of BoE think banks accounting for a third of the productivity puzzle is peanuts?

When people look away though banks seem to return to type.

Credit Suisse Group AG increased its bonus pool 6 percent…….The bank is increasing its bonus pool for the first time since 2013 in spite of a second consecutive annual loss.

 

Reuters

After posting this I note that a long post from Reuters has a different perspective to mine.

Banks used to have a cosy relationship with Britain’s government. Now they say they are struggling to be heard as the country prepares to leave the EU…….

 

Or perhaps not albeit from a different corner.

Senior bankers expected special treatment from the government after Britain voted to leave the EU. They expected ministers to champion their cause, above other industries,

 

 

The problems of the banks have not gone away

As we progress through 2017 we will reach the decade point for the credit crunch era especially in UK terms if we count from the collapse of the Northern Rock building society in October 2007 when it required liquidity support from the Bank of England. We are also left mulling establishment promises like this as quoted by the BBC.

Northern Rock is to be nationalised as a temporary measure, Chancellor Alistair Darling has said.

Now whilst some of it was taken over by Virgin Money giving the UK taxpayer a loss. some of it remains with UK Asset Resolution Limited.

Today, UKAR comprises of approximately 200 colleagues and is responsible for around 215,000 customers holding £33.1 billion of mortgages and loans.

Around £9 billion of that is from Northern Rock and the rest is from the failure of Bradford & Bingley which also failed. So we are left mulling the meaning of the word temporary one more time.

The next theme we kept being promised was that this time would be different and that there would be fundamental reform of the banking system. Actually that reform got kicked into the very long grass in the main and has yet to fully arrive. Back in 2011 the BBC reported it like this.

The ICB called for the changes to be implemented by the start of 2019…….The BBC’s business editor, Robert Peston, called it the most radical reform of British banks in a generation, and possibly ever.

Of course since then we have seen various delays and “improvements” to the plan as we wonder if it will ever be implemented or whether banks will collapse again first. So the reform so lauded by Robert Peston became this in February last year.

Sir John Vickers, who headed up the Independent Commission on Banking (ICB), said: “The Bank of England proposal is less strong than what the ICB recommended.”

In a BBC interview, he added: “I don’t think the ICB overdid it.”

The Bank of England rebuffed the criticism.

As ever the Bank of England moved to protect the banks rather than the wider economy.

Deutsche Bank

Today has seen yet more woe and bad news reported by Deutsche Bank which has never really shaken off the impact of the credit crunch. From Bloomberg.

The bank’s net loss narrowed to 1.89 billion euros in the three months through December, from a loss of 2.12 billion euros a year earlier. Analysts had expected a shortfall of 1.32 billion euros.

As I look at this there is the simple issue of yet another loss. After all the German economy is doing rather well with economic growth of 1.9% in 2016 and the unemployment rate falling to 5.9% with employment rising. So why can’t Deutsche Bank make any money?

Deutsche Bank took 1.59 billion euros of litigation charges in the fourth quarter, more than the 1.28 billion euros analysts surveyed by Bloomberg News had expected on average. While 2015 and 2016 were “peak years for litigation,” this year will continue to be “burdened by resolving legacy matters,” Deutsche Bank said in slides on its website.

Ah “legacy issues” which is the new version of Shaggy’s “It wasn’t me!”. Here is a breakdown of where they stand.

Last month, Deutsche Bank finalized a settlement with the Justice Department over its handling of mortgage-backed securities before 2008. The bank agreed to pay a $3.1 billion civil penalty and provide $4.1 billion in relief to homeowners. This week, it was fined $629 million by U.K. and U.S. authorities for compliance failures that resulted in the bank helping wealthy Russians move about $10 billion out of the country.

Also we have some signals as to what may be coming over the horizon.

A criminal investigation of the trades by the Justice Department is ongoing. The bank also hasn’t resolved investigations into whether it manipulated foreign-currency rates and precious metals prices.

Apart from that everything is hunky dory. If we look at this overall there is a very odd relationship between countries and banks these days. Banks get “too big to fail” support both explicitly and implicitly but they are also fined fairly regularly and hand over cash to taxpayers. Mind you some care is need here because Deutsche Bank is backed by the German taxpayer but the fines above have gone to the US and UK treasuries.

The one case where banks have some argument for saying official policy hurts them is in the case of negative interest-rates and of course the ECB has a deposit and current account rate of -0.4%. But whilst there is an element of truth in this there are also issues. The most obvious is that the banks wanted many of the interest-rate cuts that have been made and have also benefited from the orgy like amount of QE (Quantitative Easing) bond buying. The second is that the ECB has allowed them to borrow at down to -0.4% as well in an attempt to shield them.

These are bad results from my old employer and perhaps the most troubling of all is the impression created that clients are moving business elsewhere. For a bank that is invariably the worst situation. This is how it is officially put by the chairman.

Deutsche Bank has experienced a “promising start to this year,”

The share price had been on a strong run but has dropped 5% today so far.

Unicredit

Ah the banks of Italy! They seldom get far away from the news. It has seen its rights issue plan approved today as we mull why it need so much extra capital if things are going as well as we are told? From Bloomberg.

Unicredit Spa will sell new shares for more than a third less than their current price in a 13 billion-euro ($14 billion) rights offer aimed at strengthening its capital position.

The bank will sell stock at 8.09 euros a share and offer 13 new shares for every five held….. The offer price is 38 percent less than the theoretical value of the shares excluding the rights, known as TERP.

So more woe for shareholder as we note that the recent rally from around 19 Euros to just below 27 requires the perspective that the price was 423 Euros at the pre credit crunch peak. Also this is not the only rights issue that has been required.

In 2012, amid the global financial crisis, UniCredit sold shares at a 43 percent discount to raise 7.5 billion euros.

Also the mood music became a combination of grim and bullying.The offer document suggested that even with the extra capital there was no guarantee that things would be okay and hinted that if the bank did not get its money then shareholders would be even worse off if the bank failed.

It’s Chief Economist Erik Neilson (ex Goldman Sachs) is very opinionated for someone who works for an organisation that has performed so badly.

Comment

We are continually told that this time is different and that the banks have been reformed and then yet more signs of “trouble,trouble,trouble” as Taylor Swift would put it emerge. In the UK we have seen signs of yet another cover up at HBOS this week as Thames Valley Police reports.

Following a six year Thames Valley Police investigation into a complex multi-million pound fraud involving bank employees and private business advisors, six people have been convicted at Southwark Crown Court of fraud and money-laundering offences…….The fraud resulted in these offenders profiting from hundreds of millions of pounds at the expense of businesses, a high street bank and its customers.

When the Clash wrote these lines they were not thinking of the robbers working for the banks.

my daddy was a bankrobber
but he never hurt nobody
he just loved to live that way
and he loved to steal your money

These matters provide plenty of food for though as today 2 European banks take centre stage but it is like a carousel. Monte dei Paschi is now in state ownership and no doubt there will be more bad news from RBS. On and on and on it goes.

Me on TipTV Finance

http://tiptv.co.uk/inflation-quagmire-not-yes-man-economics/

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.