First of all, Italy is one of the greatest countries in the world and they belong to the continent of Europe which has a penchant for doing things well, but no matter how positive one decides to be that Italy can come out of its present recession and economic woes, common sense tells us that the chances of doing so are less likely than ever. Why?? Because the banks there are stuffed with “non-performing loans” (NPLs). Its jargon that loans are handed out to companies and households and then the borrower falls behind with repayments or is barely paying at all. But the Italian banks have not written off these loans as duds. Instead, billions upon billions are still on the books, written down as worth about 45% to 50% of their original value.
The following salient points are what may finally send Italy into a banking crisis:
Italy is on the cliff of a major debt and budget crisis.
The Italian economy has been in a virtual recession while its public debt increased to 2,273 billion Euros representing 132.7% of its Gross Domestic Product, despite a monetary policy that pushed interest rates to a record low. The effect of this situation on Italian banks has been to accelerate the deterioration of their loan portfolio.
Boosted by the negative interest rate policy, the current indebtedness has been bearable so far. However, the possible increase of Euro interest rates could accelerate the budget deficit of the country and increase the cost of the Italian debt. Since the bottom of mid-July 2016, the interest rates of 10-year sovereign Italian bonds have increased from 1.09 to 2.10 %.
This, in turn, will increase the cost of long-term financing of Italian banks. Analysts suggest that Italy is a $2,273 billion time bomb of which nobody knows when the markets will decide to stop trusting Italy. As experienced in most financial crises the country might be, the timing of such change of opinion is both immediate and brutal. And at that level of debt, there is no rescue possible.
The Constitutional Referendum:
With Italy’s banking sector still weak and unsteady, a defeat in the December 4 referendum dealt another blow to political and economic confidence in the eurozone, and cost the 41-year-old Renzi (prime minister of Italy) his job and political career and also the people rejected the reforms, and Prime Minister Matteo Renzi had to step down.
But, the bigger issue here is that the mere possibility of an Italian exit from the euro zone sometime in the future can cause problems in the present. If investors think there’s a 20, 10, or even 5 percent chance that Italy will exit the euro zone within the next 5 years, and that an exit will be bad for Italian banks, they’re going to be that much more reluctant to put their money into Italian banks today. Depositors will also be more reluctant to keep their money in Italian banks, fearing that those deposits will eventually be converted into depreciated liras.
Excessive Non-Performing Loans:
The largest problem of Italy’s banking sector is, however, their loan books: its banking sector is extremely vulnerable to Non-Performing Loans that built especially after 2010.
The amount of Italian banks’ troubled loans is equal to about a quarter of Italy’s gross domestic product.
Also, the amount of (NPL) is concentrated in seven of Italian best banks and several Italian Banks have recently suffered from a serious deterioration of their results and equity and are in the most threatening situations, the global ripple effect of the banking crisis have Italy firmly in its grasp, the markets are not happy with Italy’s response and have now downgraded the credit ratings of 24 Italian Banks. The future is really looking increasingly bleak.
The Banca d’Italia in denial:
The act of denial by Italy’s central bank – Banca d’Italia headed by one Governor Ignazio Visco who has been with the Banca d’Italia for 26 years came out to say that following the worst stress tests for Italian banks, here was his statement: The results of the EU-wide stress test show that notwithstanding the long and deep recession of the Italian economy, most of the largest Italian banks would be resilient to further hypothetical shocks to macroeconomic conditions.
This is simply an act of denial because this Italian central bank is responsible for the complete deterioration of non-performing loans for approving the Antonveneta acquisition by Monte Dei Paschi which had a big hand in throwing the banking system in its current situation.
The systemic risk:
The Italian banking sector which has been overwhelmed by an over-indebted country, can create a systemic banking crisis. Take, for instance, the recent initiative of the Bank of England to ask its banks to report their exposure to the Italian Banking Sector. This is one of the most recent indicators of the nervousness of the world in front of this fragility and economic misfortunes Italy is having.
Except something extraordinary happens, am sure Italy is slowly but surely heading into a bank crisis.