ITALIAN BANKING CRISIS COULD CAUSE CHAOS IN 2018

Facts

1. Since the 2007-08 financial crisis, Italy’s economy has experienced a triple-dip recession, meaning that its economy is still below the pre-2008 output levels. According to the International Monetary Fund, Italy will not recover its 2008 level until 2025, representing an entire generation of lost economic growth.
2. Between 2000 and 2017, the share of non-performing loans (NPL’s) on banks’ books rose from 5.8 percent to 21% percent of total lending. This amounts to approximately € 200 billion of NPL’s, or 12% of Italy’s GDP. Moreover, in some cases, bad loans make up an alarming 30% of individual banks’ balance sheets.  As Italian banks accumulated bad debts, investment and rate of job creation slowed down, contributing further to the lack of economic growth.
3. Amidst the economic crisis and banking difficulties, middle- and lower-class Italians have suffered. Today, 38 percent of Italians in the labor force are unemployed. The conditions are even worse for its youth: one out of every two young Italians are unemployed. This condition is worsened by Italy’s declining labor productivity relative to the eurozone economies, most notably Germany.
4. With a debt to GDP ratio of 133 percent (€ 2.17 trillion), Italy is now the second most heavily indebted nation in the European Union, second only to Greece. Add to that a deficit of 2.4% and it means Italy must spend a substantial amount of money paying off interest on its debt obligations. The increase in debt has constrained the government’s ability to undertake further public investment projects. It also means that Italy now has one of the highest debt servicing costs in the developed world, making the country particularly sensitive to an increase in such costs as a result of political risks and lack of investor confidence.
5. Italy’s domestic banks have suffered greatly over the last few years having been poorly managed and riddled by stories of fraud and scandal
6. If the next elections lead to a coalition between the non-partisan, anti-establishment Five Star Movement and its right-leaning counterparts, Forza Italia and the Northern League, it will raise serious question about Italy’s commitment to economic reforms and its continuing membership in the eurozone. For instance, the Five Star Movement wants to introduce universal income support for the poor. Given Italy’s already high levels of public debt, this policy would jeopardize Italy’s finances.
7. Given the rising Euroscepticism in Italy, with only 58 percent of Italians—the lowest of any EU nation—approving of the euro, it is possible that Italians would vote to leave the eurozone if a referendum were organized.

Remarks

Given its poor economic performance in the last several years, Italy needs strong commitment to reforms that will set its economy on the proper track. With its slow growth, high debt levels, and chronic unemployment, the last thing that the country needs is yet another protracted period of uncertainty as a result of the upcoming elections. In light of the risks that Italy poses to the eurozone, policy makers would do well to keep an eye on Italy in the upcoming months. There is no way that Europe has the resources or the ability to handle a full meltdown of the Italian financial system.   

A deteriorating financial crisis in Italy could risk repercussions across the EU exponentially greater than those spurred by Greece. The ripple effects of market turmoil and the potential for dangerous precedents being set by EU authorities in panicked response to that turmoil, could ignite yet more latent financial vulnerabilities in fragile EU members such as Spain and Portugal.

The total amount that international banks have lent to Italy alone is € 550 billion. The country’s whose banks are most exposed to Italian sovereign debt (apart from Italy itself) is France, the total exposure of French banks to Italian debt exceeds e 250 billion. That’s triple the amount of exposure of the second most exposed European nation, Germany, whose banks hold € 83.2 billion worth of Italian bonds on its books. The already deeply distressed Deutsche Bank alone has over € 11.76 billion worth of Italian bonds on its books. The other banking sectors most at risk of contagion are Spain (€ 44.6 billion), the U.S. (€ 42.3 billion), the UK (€ 29.77 billion) and Japan (€ 27.6 billion).

Biggest Italian Banks

1. Uncredit (Assets € 982 billion)
2. Intesa Sanpaolo (Assets € 677 billion)
3. Banca Monte dei Paschi di Siena (Assets € 197 billion)
4. Banco Popolare (Assets € 124 billion)
5. UBI Banca (Assets € 121 billion)
6. Banca Nazionale del Lavoro (Assets € 85 billion)
7. Mediobanca (Assets € 74 billion)
8. Banca Popolare dell' Emilia Romagna (Assets € 61 billion)
9. Banca Popolare di Milano (Assets € 49 bilion)
10. Crédit Agricole-Cariparma Group (Assets € 48 billion)