Even while Italy’s economy is just barely avoiding a recession, notable progress has been made to erase a portion of bad loans, which allows the financial sector the opportunity for faster recovery and future growth.
The country’s GDP is doing better than what was forecast, showing a 0.1 percent expansion during this year’s third quarter. Italy’s government is optimistic and hopes to see growth shoot to 0.6 percent in 2020, alongside a 2.2 percent deficit target, boosted foreign investment, and a cut in labour taxes. The European Commission will likely weigh in on the budget by the end of the month – a necessary task so that the Italian government can approve it by the year’s end.
On the flip side, political instability and high debt continues to knee-cap growth, and this 0.1 percent rate is the most we can expect – at least when looking into the near future – especially if the rest of the eurozone follows suit. With the likelihood of Germany entering a recession and manufacturing across the eurozone trending downwards, a resulting euro-wide slowdown is a distinct possibility.
Bank of Italy Governor Ignazio Visco recently spoke at a conference about the issue, noting that “manufacturing suffered greatly from the negative impact of the global economic outlook, from close production and trade links with Germany. Weakness was likely offset by a small expansion in services and construction”.
Some experts are predicting exactly zero growth in 2020. “We forecast GDP growth of around zero next year, well below the consensus forecast of a 0.4 percent expansion”, states a report from London-based research company Capital Economics. “[T]he economy is likely to remain very weak.” Italy is the eighth largest economy in the world and the third largest in the eurozone, which means a drag felt on their economy is a drag felt worldwide.
Meanwhile, there is concern over the erosion of Italy’s industrial sector, especially when the hotly contested purchase of the Ilva site plant by ArcelorMittal, the world’s biggest steel-maker, came to a breaking point earlier this month. The company attempted to back out of the Ilva sale after the capital withdrew on a promise made to grant heavy pollutant ArcelorMittal immunity from prosecution. This prompted ire from Italian Prime Minister Giuseppe Conte, as shutting the deal down would leave thousands jobless. “If the government … forces the owners of Ilva to flee, putting at risk tens of thousands of jobs and the industrial future of the country, it will be a disaster,” commented League leader Matteo Salvini.
Luckily, Italy has other ways of making money. Next year, the government plans to unveil a new “web tax”, which will force big digital companies to pay a 3 percent levy on some Internet transactions. The Italian web tax will be applied to companies with annual revenues worth at least 750 million euros and digital services exceeding 5.5 million. The Treasury forecast in December that the web tax would yield 600 million euros in revenues from 2020.
Not everything depends on taxes, however. Despite the current pro-European government’s welcome in Brussels, the recently on-the-outs Matteo Salvini of the anti-establishment, Euro-sceptic League party retains immense popularity at home. He is calling for new elections, and he may yet roar back into government if the current coalition collapses.
Banking Benefits
Italian bank Intesa has done particularly well in this year’s third quarter, recently posting a 25 percent rise in net profit – mostly from trading gains, steady fees, and offsetting a drop in interest income. The institution also solidified its core capital to 14.2 percent of assets a little more than a month ago, relying on the strengthened Italian bonds that resulted from the recent pro-European government and stimulus measures from the European Central Bank. Overall, the bank reported a third quarter net profit of 1.04 billion euros, topping a previous Reuters average forecast of 949 million euros.
Intesa is not a one-off example, however, as rebounding bond prices have helped banks in Italy overall while simultaneously lifting the value of reserves that lenders rely on as capital. Italian banks have also benefitted from boosted investor confidence thanks to the new pro-European government in Rome. Many are hoping for a departure from the spooked markets and inflated borrowing costs that marked the previous Euro-sceptic government.
Intesa, like other Italian banks, was successful in reducing bad loans – often referred to as non-performing loans. By September’s end, Intesa had decreased its NPLs to 7.6 percent of the total loans, which also came after a previous reduction of 2.7 billion euros worth in similarly bad “unlikely to pay” loans.
Cerved, a credit rating agency, is also seeking to combine its debt management division with a debt purchasing business as it studies the possible sale or merger of the unit. The company hired Mediobanca as an adviser to look at options for its division, which manages 54.5 billion euros in mostly impaired and under or non-performing loans.
Italy’s loan recovery industry in particular has grown quickly in recent years, due to the roughly 170 billion euros in impaired loans that banks are struggling to offload in order to meet supervisory demands. But now as the disposal of NPLs is easing, financial institutions are looking to consolidate in the face of increased competition and regulatory changes.
Though Italy has a long way to go before its banks get rid of bad loans entirely, NPLs no longer pose any more risk to the country’s financial stability, which is marked progress. Economy Minister Roberto Gualtieri noted during a conference in Rome that “Cleaning up…their balance sheets is a target lenders have not yet reached but it is clearly an achievable goal.”
