Euro-Area's Problem Child Lags As Renzi Chases Italy Growth

  • Bank, sovereign debt weigh on euro area's 3rd-largest economy
  • Italy's GDP remains 8% below its pre-crisis level of 2007

Try as he might, Matteo Renzi just can’t push Italy’s economy into the euro area’s premier league.

Progress in the currency bloc’s third-largest economy has been hobbled by dizzyingly high levels of debt for the government and mountains of bad loans that burden the country’s largest banks and weigh on their stocks’ performance.

Italy is and will likely remain a “problem child within the euro zone,” said Marco Wagner, an economist at Frankfurt-based Commerzbank. “The problems of the Italian economy and the Italian banking systems are fundamentals, they are genuine problems. They are not cyclical, so not going away any time soon.”

While the economy probably grew for a fifth quarter at the start of the year, gross domestic product remains 8 percent below its pre-crisis peak reached in 2007. Within the euro area, that leaves Italy’s gap second only to Greece in terms of ground to be made up. The 19-nation region, by comparison, has regained that level, while France and Germany have long surpassed it.

The yield difference, or spread, between Italian 10-year bonds and the equivalent German bund has widened about 40 basis points this year. It narrowed 1 basis point to 137 basis points as of 10 a.m. Rome time.

Italy returned to growth in 2015 after emerging from its longest economic slump since World War II, and Prime Minister Renzi is cutting taxes on property and giving lower-paid workers a tax rebate to boost domestic demand.

Still, the European Commission cut its 2016 growth forecast to 1.1 percent from 1.4 percent this month, citing weaker exports. Davide Campari-Milano SpA reported estimate-topping first quarter results on Monday, helped by the timing of Easter. While it expects a positive performance this year, it also noted that volatility in some emerging markets will continue during 2016.

In the first quarter, Italy’s economy probably expanded 0.3 percent, half the pace seen in the 19-nation euro zone. The Italian data, along with a second estimate for the euro area, will be published Friday.

That period was marked by growing concerns over the nation’s banking system that have since only partially been weathered. Italy’s FTSE MIB Index has lost 16 percent this year and is the worst performer among all developed markets tracked by Bloomberg.

Statistics office Istat has also tempered its view on the economy because of softer global demand. It now sees growth cooling this quarter, having previously expected a similar pace to the January-March period.

Worries about banks centered on their 360 billion euros ($410 billion) gross amount of non-performing loans, a debt burden that’s hindering lending and stifling profitability. While Renzi’s government and the European Commission agreed in January on a plan to help financial institutions offload the debt, it fell short of what the Italians wanted.

The government also facilitated the creation of a bailout fund known as Atlante. Its first rescue -- earlier this month -- ran into difficulties when private investors snubbed an initial public offering by Banca Popolare di Vicenza SpA.

Bank of Italy Governor Ignazio Visco said last week that while some of the country’s bankers made mistakes or even committed crimes, the bad-loan problem is mainly due to a 25 percent plunge in industrial output in the six years through 2014.

Industrial production failed to show any growth in March, Istat data said Tuesday, despite a forecast of a 0.2 percent gain. Markit Economics said this month that Italian business activity remained “subdued” at the start of the second quarter.

In addition to bank debt, Renzi also has to deal with a sovereign debt pile that amounted to 132.7 percent of GDP in 2015. The European Commission predicted last week that Italy will fail to meet its debt-reduction goal this year and the ratio will remain unchanged. The government has forecast a small decline, to 132.4 percent.

“Italy’s growth under-performance is long-standing and results from structural problems that have left productivity trailing the rest of the euro area,” said Cathal Kennedy, European economist at RBC Capital Markets in London. “Measures to unblock bank lending channels and get credit flowing back to the real economy is a particularly critical focus for policy intervention in the near-term.”

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