The Italian Job covers unemployment.zombie banks and industrial production

by Shaun Richards

Sometimes economic news makes you think of a country via its past history.

LONDON/FRANKFURT (Reuters) – European Central Bank officials are drawing up a scheme to cope with potentially hundreds of billions of euros of unpaid loans in the wake of the coronavirus outbreak, two people familiar with the matter told Reuters.

After all the Italian banks have plenty of expertise, if I may put it like that, in this area. So perhaps a growth area for them in more ways than one.

The amount of debt in the euro zone that is considered unlikely to ever be fully repaid already stands at more than half a trillion euros, including credit cards, car loans and mortgages, according to official statistics.

There is a conceptual issue though as we mull why we always need “bad- banks” and whether the truth is that ordinary banks are bad? Also the Irish banking crisis taught us that the numbers are fed to us on a piece of string with notches and are driven by what they think we will accept rather than reality. So get ready for the half a trillion to expand and that may get a little awkward if this from Kathimerini proves true.

Enria said the ECB was studying how banks could cope were the crisis to worsen. He said banks had more than 600 billion euros ($680 billion) of capital and this would probably be enough, unless there were a second wave of infections.

If we focus now on the Italian banks there is of course the issue of the Veneto banks and Monte Paschi in particular. Let me take you back 3 days over 3 years.

Italian banks are considering assisting in a rescue of troubled lenders Popolare di Vicenza and Veneto Banca by pumping 1.2 billion euros (1.1 billion pounds) of private capital into the two regional banks, sources familiar with the matter said.

Good money after bad?

Italian banks, which have already pumped 3.4 billion euros into the two ailing rivals, had said until now that they would not stump up more money.

Back then I also pointed out the problems for the bailout vehicle called variously Atlante and Atlas. Looking at Monte dei Paschi the share price is 1.4 Euros which if we allow for the many rights issues and the like compares to a pre credit crunch peak of around 8740 Euros according to my chart.. Some quite spectacular value destruction as we again mull what “bad bank” means and recall that in 2016 Prime Minister Renzi told people it was a good investment. That is before we get to this from January 2012 on Mindful Money.

In October, Shaun Richards outlined a 13-step timeline for the collapse of a bank . He appeared on Sky News yesterday suggesting that Unicredit, Italy’s had now reached stage 3 of that process – i.e. “The Bank tries to raise more private capital in spite of it having no need for it”.

It was worth 19 Euros then and as it is worth 8.24 Euros now my description of it as a zombie bank was right, especially if we allow for all the aid packages and subsidies in the meantime.

Oh and in case we had any doubts about the story I see this from ForexLive.

European Commission says no formal work is underway for an EU ‘bad bank’

So they are informally looking at it then….

The Economy

This morning’s official release was always likely to be bad news.

In April 2020 the seasonally adjusted industrial production index decreased by 19.1% compared with the
previous month. The change of the average of the last three months with respect to the previous three
months was -23.2%.

The theme was unsurprisingly continued by the annual picture.

The calendar adjusted industrial production index decreased by 42.5% compared with April 2019 (calendar
working days being 21 versus 20 days in April 2019).
The unadjusted industrial production index decreased by 40.7% compared with April 2019.

If we compare to 2015 we see that the calendar adjusted index was at 58.4. The breakdown shows that pharmaceuticals were affected least ( -6.7%) and clothing and textiles the most ( -80.5%). The latter was a slight surprise as I though the manufacture of masks and other PPE might help but in fact it did even worse than the transport sector ( -74%).

On Monday Italy’s statisticians reminded us of our Girlfriend in a Coma theme.

At the end of 2019, the Italian economy was in stagnation with few recovery signals coming from industrial production and external trade at the very beginning of 2020.

Which was followed by this.

Eventually, the conventional economic indicators assessing the dramatic fall of GDP in the first quarter 2020 (-5.3% q-o-q) were published.

They point out it is difficult to collect data right now but were willing to have a go at a forecast.

Under these assumptions, we forecast a strong GDP contraction in 2020 (-8.3%) followed by a recovery in 2021 (+4.6%, Table 1). This year, the fall of GDP will be determined mainly by domestic demand net of inventories (-7.2 p.p.) due to the contraction of household and NPISH consumption (-8.7%) and of investments (-12.5%). Net exports and inventories will also contribute negatively to GDP growth (respectively -0.3 p.p. and -0.8 p.p.).

I wonder how much of what is called domestic demand reflects the fall in tourism as the summer is already well underway and it is a delightful country to visit? Here is the OECD version from earlier this week that highights the tourism issue.

GDP is projected to fall by 14% in 2020 before recovering by 5.3% in 2021 if there is another virus outbreak
later this year (the double-hit scenario). If further outbreaks are avoided (the single-hit scenario), GDP is
projected to fall by 11.3% in 2020 and to recover by 7.7% in 2021. While Italy’s industrial production may
restart quickly as confinement measures are lifted, tourism and many consumer-related services are
projected to recover more gradually, weighing on demand

As we know so little about what is happening right now the forecasts for 2021 are about as much use as a chocolate teapot in my opinion.

Switching back to Italy’s statisticians they seem to have doubts about their own unemployment numbers. perhaps they read my post on the third of this month.

The trend of unemployment rate will be different because it reflects the ricomposition between unemployed and inactive people and the fall in hours worked.

Anyway they have reported the unemployment rate at 6.3% and I think it is more like 11%.


Now we need to switch tack to one of the consequences of all this which relates to the fact that Italy already had a large national debt in both relative and absolute terms. If we use the OECD data as a framework we see that the debt to GDP ratio will be of the order of 160 to 170% at the end of this year which looks rather Greek like, Now we see the real reason for the forecasted bounce back in 2021 which reduces the number to 150% to 165%. The establishment assumption that we will see a “V-shaped” recovery has nothing to do with believing in it,rather it is to make the debt metrics look better. Again there are echoes of Greece here when Christine Lagarde was talking about “Shock and Awe” back in the day. Remember when we were guided to a debt to GDP ratio of 120%? That was to protect Italy ironically ( as well as Portugal).

That was then and this is now. The game-changed in the meantime has been the fall in bond yields due mostly to the policies and buying of the ECB. So a benchmark yield that rose to 7% in the last crisis is now 1.45% as I type this. Thus the previous concept of debt vigilante’s has been neutered and debt costs are low. The catch is that the debt burden will soar and that does seem to have an impact if we think of the issue of Japanification. Italy has already had its “lost decade” since it joined the Euro and the lack of economic growth has been the real issue here. For it to change I think we need reform of its structure and especially its zombie banks but instead we are being guided towards yet another bailout in what feels like a never-ended stream. Let me leave you with some humour on the issue of bad banks from GreatLakesForex.

They should correct that statement to the actual fact that they are desperate to create a Good bank in the Eurozone.