Italy Once Again on the Eurozone Worry List

A new tsunami of bad debts washes ashore while banks are still struggling with the debris from the prior tsunami of bad debts.

By Nick Corbishley, for WOLF STREET:

Over half of Italian companies reported facing a liquidity shortfall by the end of 2020 and 38% reported “operational and sustainability risks,” according to a survey of 90,000 companies conducted by Italy’s national statistics institute ISTAT.

The national Italian business lobby, Confcommercio, recently estimated that 60% of restaurants and other businesses were short on liquidity and 30% had complained about the extra costs of implementing anti-contagion safety measures so they can start serving customers after lockdown.

The tourism industry, which accounts for 13% of GDP and has been crucial in keeping Italy’s economy afloat over the past decade, providing jobs for an estimated 4.2 million people, is in post-lockdown limbo. The borders have opened but foreign tourists still remain elusive. And with many local residents in no financial position to go on holiday this year, domestic demand is unlikely to pick up as much of the slack as tourism businesses are desperately hoping.

Tourism was one of the few parts of the economy that has been growing in recent years. Last year, for instance, it grew by 2.8% while Italy’s industrial output shrank by 2.4%. In an economy that hasn’t grown for well over 10 years while public debt continues to grow at a frightening rate, its fastest growing sector has just been hit with the mother of all sledgehammers.

Italy’s manufacturing industry, which was already struggling before the crisis, is also in trouble. In April, when Italy was in the grip of one of the most severe lockdowns in Europe, ISTAT’s industrial turnover index plunged by 46.9% while the unadjusted industrial new orders index fell by 49.0% with respect to the same month of the previous year. Since then, many businesses have reopened but activity remains low.

To weather the lull, many companies need credit. But this is easier said than done in Italy, unless you’re a multi-billion dollar company. Car giant Fiat Chrysler is on the verge of being granted a €6.3 billion state-backed loan — more than any other European carmaker. Even Atlantia, the firm that operated and maintained the Morandi Bridge in Genoa that collapsed in 2018, resulting in 43 fatalities, is hoping to hit up the government for a €1.7 billion loan.

Meanwhile, hundreds of thousands of small businesses continue to wait. In the early days of the crisis the Conti government said that debt guarantees would be made available to unlock up to €740 billion in funding for businesses. Yet by May 20, just 301,777 of 607,391 requests for assistance had been granted, according to a report by Italy’s bicameral investigative commission. (An accepted request doesn’t mean a loan has actually been dispensed).

For those companies that fall through the cracks of Italy’s emergency loan system, many of which were functioning perfectly well before the coronavirus crisis, the temptation is to go cap in hand to mafia-affiliated loan sharks, who are more than happy to help out. In Calabria the Ndrangheta “initially come in with offers of low interest rates, because their end goal is to take over the business, via usury, and use it to launder their illicit proceeds,” says Public Prosecutor Nicola Gratteri.

Even before this crisis began, Italy’s half-broken banking system and endless morass of red tape made getting a business bank loan an almost impossible task — apart from for the legions of zombie firms that already owed banks huge amounts of debt they will never repay and which would periodically get restructured. In the last crisis the share of the industry capital stock sunk in zombie firms more than doubled, from 7% to 19% between 2007 and 2013, according to the OECD. Something similar, but on an even larger scale, is likely to happen by the end of this crisis.

And that is the last thing that Italy’s economy and banking system need. Despite a massive clean-up effort in recent years, non-performing loans (NPLs) still account for 7% of Italy’s total loans, one of the highest ratios in Europe. That’s down from almost 17% five years ago, thanks to the mass securitization of Italian NPLs. Investors in these securitized NPLs expected to earn their return based largely on the proceeds from the sale of the underlying collateral.

The process of securitization depended on two basic conditions that are now in question: 1. investors’ willingness to invest in sliced and diced toxic debt a la Italiana; and 2. the ability of debt collectors to recover and sell the underlying assets.

The lockdown made condition 2 virtually impossible. Courts were closed. The Italian housing market, where the collateral for housing-related loans would have to be sold, was brought to a standstill. And debt collectors were unable to reach borrowers to negotiate even partial payments on unpaid loans.

If collections in Italy keep falling, the income generated might not be enough to pay the investors that bought the securitized non-performing loans. In that case, according to the Wall Street Journal, investors in the mezzanine and junior securities would lose their investments and Italy’s already financially challenged government, which guaranteed the senior securities to make the deals attractive, would have to foot some of the bill.

Italy’s banking system will soon be engulfed by a new wave of non-performing loans as legions of companies, households, and individuals default on their debt during the post-lockdown era. When that happens and NPL ratios in Italy’s banking sector soar well into double figures again, just as the market for securitized Italian NPLs begins to crumble, Italy’s banking system will not only be back where it was circa 2015, it will be in an even worse place.

The Italian government is already in fiscal tightspot. By the end of this year its debt will already have surged to around 155%-160% of GDP, from last year’s 136% — the result of three simultaneous processes: massive growth in government spending to counter the virus crisis, a dizzying slump in tax revenues, and a sharp decline in GDP.

If Italy’s government is unable to deal with the approaching tsunami of bad debt, external help will soon be needed. Other Eurozone members will be in the same boat, which is why the ECB is quietly talking about creating a bad bank to “warehouse” hundreds of billions of euros of unpaid debt. Getting the blessing of some Northern European countries, particularly Germany, for the scheme will be a tough task, especially given the current standoff between the German Constitutional Court and the ECB. But for Italy’s economy, time is of the utmost essence. By Nick Corbishley, for WOLF STREET.

“People do not buy a new outfit to stay at home.” Sales at stores that have reopened languish while ecommerce is booming. Read… Europe’s Fashion Industry Faces Nightmare

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  45 comments for “Italy Once Again on the Eurozone Worry List

  1. 2banana says:

    Well, it worked for Enron…for awhile.

    “Other Eurozone members will be in the same boat, which is why the ECB is quietly talking about creating a bad bank to “warehouse” hundreds of billions of euros of unpaid debt.”

    • Joe Saba says:

      Italy’s manufacturing industry, which was already struggling before the crisis, is also in trouble.
      and Germany thanks all southern countries for their manufacturing businesses

      before when LIRA was around – Italy, Spain, etc. could DEBASE THEIR CURRENCY to accommodate inefficiencies

      but today they have EURO which is KILLING southern countries – not they have become TAKES from their little eu masters

      • Willy2 says:

        – Southern Europe had a history of debasing their currencies in the 1960s, 1970s & 1980s.
        – And the “reward” for those debasements was (much) higher interest rates. E.g greek interest rates were in 1990 at 25% (!!!) when german rates were at about 10%. Over the next say 18 years (think: introduction of the EUR) the difference between the 2 rates shrank to a paltry 0.3 %. Germany was in mid 2008 at about 4.5 % and Greece was at ~ 4.8 %.
        – In that regard, Southern Europe has massively benefitted from those falling rates between 1990 and early 2009.

        – A LOT OF people still think that Germany is a rich country. Well, based on info coming from Germany I don’t share that opinion. Yes, production costs (think: wages) in Germany are surprisingly low but that also means that the income & spending power of the average german Household is also at the same (low) level.

      • Willy2 says:

        – People who advocate Brexit and a Italexit are – in my opinion – overlooking a few things.
        – Does Brexit & Italexit solve the problem of the (VERY) high levels of debt in both countries ? The debt-to-GDP ratio in the UK is higher than in the US !!! Did the EU in Brussels FORCE italian companies and british households to take on more debt ?
        – Does a Brexit or an Italexit solve the problem(s) of an ageing population (like in the US & Canada) in both the UK & Italy ?


      The “bad bank”.

  2. gorbachev says:

    Why would you lend to someone who

    has a history of not paying most people back.

    • Thomas Roberts says:

      Banks might be forced to lend to people with a high risk rate. Because, of legislators.

      Rich people buy some risky assets, because, everything is inflated and you gotta stick your money somewhere. If you are rich, the safest way to hold onto at least some money is to diversify as greatly as possible. Some of these assets might be partially funding the banks.

      The EU will possibly collapse or become less meaningful, if enough of its economies are doing poorly, who might then leave. Before Brexit the EU had 5 pillars the UK, France, Germany, Italy and Spain; all were roughly the same population and rougly the same size economy, even their land sizes were all in the same magnitude. These pillars made up majority of EU economy and population.

      Now, that the UK left, Germany and France the best 2 performing pillars have to decide whether to prop up the remaining pillars and smaller economies. There are counting the pillars 27 countries in the EU. The EU is economy wise about on par with America and gives all the small and medium sized countries in Europe a combined power to deal with the rest of the world.

      If the EU, Germany especially, doesn’t bail out weaker countries, the EU might come crashing down. The simpler solution would be to reduce eurozone, but, more drastically leaving the EU, seems to be what countries threaten to do.

      As the largest economy, manufacturing hub, and home to the European Central Bank. Germany has a lot of influence, with the ECB.

      • Javert Chip says:

        Thomas Roberts

        ent: Your comm”…The EU is economy wise about on par with America…”

        US GDP is significantly larger than EU (with or without UK). Don’t know where you get your data, but for 2019, here’s mine – with & without UK in EU):

        2019 (INCLUDING UK) = US GDP 17% larger than EU:
        US GDP 21.43T; US population = 328M
        EU GDP 18.29T; EU population = 514M

        2019 (EXCLUDING UK) = US GDP 33% larger than EU:
        US GDP 21.43T (17% larger than EU); US population = 328M
        EU GDP 16.08T; EU population = 449M


        • Thomas Roberts says:

          Javert Chip,

          About on par doesn’t always mean within 1 to 2 %. So relatively it’s still on par. When you compare countries you always have to take exchange rates into account. Next year the EU might be bigger than America. Will it? The exchange rates can fluctuate quite a lot.

          Also you have to remember countries measure GDP very differently, is US healthcare better than Germany for the average person, no, but, in the the US it’s a far larger part of gdp. Many countries that have a lot of finance, manage to count dollars multiple times or dollars simply flowing through them. If the EU sucks the finance out of the UK, its GDP will also be higher, possibly even more than with the UK in it. GDP is only a very rough measurement of an economy. It’s mainly useful if you measure it in the country’s native currency to track growth, taking alot into account. It can also give very rough estimations to compare countries economies with.

          The EU also exports more and has better industry than the U.S., this is counting out trade between member states.

        • Javert Chip says:

          Thomas Roberts

          Yea, I got all that. We’re just going to have to agree to disagree that a $2-4T difference is insignificant (FYI German GDP is about $4T).

          But, at the end of the day in 2020 and beyond (ie without UK) , the best numbers available show the EU as 33% smaller.

          EU is falling further behind due to BREXIT & (most importantly) less productive economies.

          The EU also has a real problem leveraging it’s economic size because it’s not really a unified economic unit…not to mention, the whole continent is militarily dependent on the US (except for a few nuclear devices in France & UK).

    • Trinacria says:

      Some food for thought…There is an old saying that my uncle over in Italy told me in my youth: “Italy is poor, while Italians are rich”….
      Recently, I read (somewhere) that the average net worth of an Italian family is higher that that of the German family.
      From living over there with my relatives I noted the following:
      1. Homes stay in the family to a great extent and, many Italians own several homes – while Germany has a larger percentage of renters.
      2. There is more small business ownership in Italy vs. Germany. I am sure that this leads to revenue that escapes taxation. A few years ago there was a crackdown by taxing authorities on business owners in the posh resort town of Cortina d’Ampezzo for this very reason. But still, the black market seems to be alive and well. Many Germans, on the other hand, seem to be happy having long careers with the large corporations there, so all is captured by the taxman.
      3. In the old days, Italy would simply devalue the Lira over the weekend, and life would go on….cannot do under the Euro. So, just a question of time before it blows up.
      4. No secret the Italian government is a basket case, especially now.
      So, will certainly be interesting how this all plays out. Gird those loins!!!

  3. Cobalt Programmer says:

    PIGS-Portugal Italy Greece Spain.
    What happened to the other three?
    I think the situation in the Greece is also same.
    Spain will follow because tourism from UK is affected.
    Sometimes ago, there was a right-wing leader in Italy running for elections. He promised to end the tyranny of other European countries.
    No not the Mussolini….

    • sierra7 says:

      Cobalt Programmer:
      How far down the slippery ladder of declining intellectuality we have come to give such a name to countries: “Pigs”…..(PIGS)……
      We’ve come a long way baby…..

  4. Raymond Rogers says:

    How much of this could just be kept on the ECB balance sheet? If the FED’s balance sheet can grow to infinity, why not also the ECB? If the US national government gives the interest owed to the FED, and the FED says here have it back, Europe can kick the can down the road for another decade.

    I suppose if all countries are ruining their currencies simultaneously they can keep the charade going until civil unrest kicks in after social safety nets and pensions are inflated away.

  5. EH says:

    Welp, like us, jpn, and china, eu also have the option of solving the current problem right now or push it to the next generation. I think we all know where this event go

    • BuySome says:

      Might it have something to do with any long term worldwide deflation in the number of high falootin’ shiney shoe’d monkeys running rampant and reproducing like a strain of disease upon the planet? Anyone volunteering to get in line for the disintegrator machine this week?

  6. MC01 says:

    For once I have to give Nick a little slap on the wrist.

    Business loans here in Italy are actually very easy to obtain, and have become even easier to obtain during the Covid-19 crisis, to the point banks now even pester customers with unsolicited offers for them. I have got three of them from the same bank over the past month.
    Far too many metalworking firms in my area used these easy loans to expand operations to become vendors to the German automotive industry, a sector with rice-paper-thin margins and requiring heavy investments: modern casting technologies are simply amazing, but the tooling needed for them is tremendously expensive.
    Now all these folks are stuck with enormous loans to repay and little work, as the German automotive industry has restarted but really struggles to find buyers. As a BMW engine designer told me “People have other things on their mind than buying a 3-series”.
    I will mercifully skip over the construction and real estate industries.

    Tourism is a different thing. Believe it or not the tourists have already started returning (many people here will clutch their pearls at the thought): on Saturday morning I saw the first German registration plates during my ride, mostly very nice cars (Lamborghini Huracán, Porsche 718 etc). There are now far more flights between Germany and Italy than between Germany and Spain and tourists will find a country with far fewer restrictions right now: I have to say that for once the government has moved to salvage a terrible situation. Mors tua, vita mea and all of that.
    But the first two and a half months of the tourist season are lost, and the rest of the season will be marked by much reduced numbers. Everybody around the world is scrambling to win back tourists right now, meaning margins will become rice-paper-thin, especially as the year advances and the real nature of the damage wrought on the economy is revealed.

    In turn this will cascade into politics, as governments refuse to even contemplate offering angry folks a scapegoat of any kind. In Italy the big political issue is the double whammer of a devastating hard lockdown and of over 34,000 victims, a little over two thirds of them in nursing homes. Somebody will have to answer for that, and that’s the reason why the PM Conte is desperately trying to keep a nationwide state of emergency to make it harder turning him into a scapegoat. But numbers aren’t on his side: apart from two Regions the epidemic is over in Italy.
    I won’t shed any tears if he’s dragged from power and torn to ribbons by his former allies but I’d love to see him accompanied by his “scientific” advisors, most of the media and a whole lot of hospital directors, mayors and other two bit aspiring dictators.

    • Wolf Richter says:


      “I have got three of them from the same bank over the past month.”

      That’s because you don’t need a loan. My bank too has been desperately trying to lend me money for years (at some “prime rate” +5% to +7% or something), but I don’t need a loan, and I don’t want a loan at anything +7%. Even PayPal wants to lend me money (I guess through an affiliated bank). Banks are great about lending money to those who don’t need a loan. But I remember, back in the day, when I really needed a loan, no matter what the rate, no bank would lend to me ?

      • Jos Oskam says:

        You’ve probably heard the old sayin’:

        “Banks are willing to lend you an umbrella when the sun shines, but want it back the moment it’s starting to rain”.

        My great-grandfather already said that. Nothing has changed, obviously.

      • MC01 says:

        I have a relative with a restaurant on Lake of Garda. That should say it all.
        Back in April, when he didn’t know if he would be allowed to re-open, let alone when, he received an unsolicited loan offer from his bank.
        “French type” loan at 1.58% EAPR running 7 years with two options: €25,000 or €50,000. A “French type” loan means for the first 2 years one pays back the interest alone, then he starts paying off the principal as well.
        I am pretty sure he was just one of the many who received a similar offer.

        Both smaller local banks and the local subsidiaries of BNP-Paribas and Crédit Agricole have been extremely aggressive over the past 4-5 years: it was them that largely bankrolled the transformation of the local metalworking industry into a defacto vendor for the German automotive industry.
        Now these banks face a veritable wave of defaults, especially considering from January 1 2021 Italy will adopt the new EU rules for bad debt: any loan (including mortgages, credit cards, car loans and all sorts of consumer loans) over €100 which is over 90 days late is automatically considered an NPL and should be reported as such. Failure to do so will result not merely in heavy fines but possible persecution as well.
        There’s very little room for banks to engage in the same antics as in 2008-2013.

        • Lisa_Hooker says:

          MC – I especially liked the use of persecution instead of prosecution. Most appropriate.

      • Lisa_Hooker says:

        I recall, and it was quite awhile ago, when I was traveling the banks trying to get an SBA loan, a loan officer told me, off the record, that I wouldn’t get a loan as I was not the right color. Nowadays that is politically unacceptable. Unacceptable to say, not to do.

      • George Kovachev says:

        Indeed. Most of the banks don’t want to lend to the people in need; their goal is to make a loan to people, who possess valuable assets to be used as collateral (and potentially seized, at the first sight of a problem with repaying of the loan). Not to mention the fact, that if you don’t need loan, then you probably earn enough to pay an interest on a loan. And the interest for the banks is free money (creating the loan cost nothing for them).

    • Miltonguy says:

      Good comments and supporting the wholesome Italian tradition of wiping out the current government: but who or what is going to replace it – and how are they going to do better?

    • sdb says:

      MC01 ,

      I just took another look at Rolling Cam Venice @ YT .

      ( I don´t know if I can link from here.)

      It looks like an empty town when comparing to my last summer visit .

      Still A Long Way To Go .

      • Prof. Emeritus says:

        Found that webcam, the city is quite a sight without the armies of foreigners. Thanks!

      • MC01 says:

        Venice is a place for Americans and Asians. Neither are coming back any time soon.

        Here’s where tourists go.
        The Bavarians usually head for the Lake of Garda
        The Dutch usually head for the Lake of Iseo
        The British usually head for Tuscany
        The Swiss usually head for Croatia and only pass through
        The Austrians are direct competitors
        And nobody likes Belgians (both flavors) because they are cheapskates

        Stereotype rules. ;-)

        • MiTurn says:

          Like they say, ‘the problem with stereotypes is that they tend to be true.’

  7. Willy Winky says:

    ‘That’s down from almost 17% five years ago, thanks to the mass securitization of Italian NPLs. Investors in these securitized NPLs expected to earn their return based largely on the proceeds from the sale of the underlying collateral.’

    This smells worse than a rotting corpse….

  8. historicus Johnson says:

    the Italian ten year was under 1% a few months ago…
    the disconnect between return and risk has been distorted continually by central bankers….

  9. MiTurn says:

    Where’s China is all of this? Doesn’t the scenario described above make some bankrupt or near-bankrupt Italian companies attractive for purchase or investment? Intellectual property, and all that sort of thing. I’d think that we’d see a lot of interest from Chinese buyers.

    • Prof. Emeritus says:

      One of the first law the Italian government put in place after the coronavirus stuck is a buyout restriction for foreigners preying on Italian companies. You need an approval from politicians for merger & acquisition with any Italian business. I think they will let a few purchase go ahead, but mainly for Western companies, China is 100% out of question.

  10. John V says:

    Not to worry, our Fed can just print up a whole bunch of money and bail them out like it has for everyone else. Why worry, be happy, eh?

  11. Lisa_Hooker says:

    This is not an issue. The Italians will simply go on strike for better conditions.

  12. Engin-ear says:

    “By the end of this year its debt will already have surged to around 155%-160% of GDP,…. — the result of three simultaneous processes: … a sharp decline in GDP”

    Many thanks for reminding me this mechanic.

    Indeed, the surge of debt/GDP will be breathtaking.

  13. sunny129 says:

    I am sick of reading ‘ Worried conditions of Italy, Spain++’ for over 5 years

    With all the talk of impending crisis, every other month, NOTHING really happens. It is all PRETEND & EXTEND maneuvers and kick the can down, one more time. Some patch up here and there, and business as usual.
    Hear no evil, See no evil and Speak no evil!

    Capitalism if there was any real one, in the first place, European Banks would have been bankrupt long ago! it is a joke.

    • Javert Chip says:


      I doubt there’s any single number (eg: >x% debt-to-GDP) that. if breeched, causes the house of cards to tumble down.

      Rather, economies keep dong crazy stuff to keep zombies afloat and life goes on…EXCEPT that the economy continually loses productivity and flexibility. After a generation )or more) of this, you end up like Italy & Greece: massively poorer, grossly unable to compete (except for tourism $), and dependent on others.

      • sunny129 says:

        IMHO it is all about PERCEPTION management and the right kind of narrative (aka BS) the public and the investors keep on swallowing and believing in ‘pretend & Extend’ fairy!

        • Javert Chip says:

          Maybe another way of looking at it is “relativity”. Generally speaking, RELATIVE TO THE REST OF THE WORLD, the US economy:

          o With 4% of global population, produces 23% of global GDP (nominal value)
          o Owns the world’s major reserve currency (the most stable & liquid)
          o Is more flexible (adapts to change)
          o Is more creative (drives change)
          o Is less corrupt
          o Is more productive (not in all things, but across a broad spectrum)
          o Actually builds goods & services the world wants to buy
          o Is generally perceived as “safest”

          In Addition:

          o 40% of global debt is denominated in USD (if you had a choice, would you really loan money to be paid back in Mexican pesos or Venezuelan Bolivars?)
          o 60% of global Central Bank reserve are USD
          o (a/o 2014) 51% of global cross-boarder flows were USD, followed by 31% Euro, 5.4% British Pound, and 11% Japanese Yen + Chinese Yuan

          Don’t accuse me of claiming the US economy is perfect or USD domination is will last forever. However, competitors have a huge mountain to climb (remember when Japan was supposed to surpass the US economy in the late 1980’s?).

  14. clyde the snide says:

    We already know what will happen.

    Central banks will either loan the money or provide the guarantee.

    Central banks will continue this until fiat currencies are worthless.

    They will not stop for anything.

  15. B Wilds says:

    The Euro-Zone was already in deep trouble before CoVid-19 hit, the weakness that started in 2017 never ended. The region simply isn’t competitive. In the fourth quarter even Germany narrowly escaped recession. France, Spain, and Italy are looking at continued large unemployment levels. Add to this the fact the EU lacks technological and intellectual property and is falling further behind China and the U.S.

    Recently they started promoting a huge stimulus package. To fund the €750BN package, the EU would borrow on financial markets and put in place a suite of proposed new EU taxes and levies to pay back the debt over the coming decades.

  16. stephan black says:

    heh heh we hear a lot about the woes of italy…but i wonder about switzerland…they

  17. stephan black says:

    we hear about italy being on the worry list….i would like to ask about switzerland….they have printed 22 billion dollars worth of swiss francs…out of fresh air an ink,,,and bought mostly american equities….now i would like to know what happens to those 22 bilion plus printed swiss francs….dont they come flooding back to switzerland causing havoc….

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