A drag on growth.

Photographer: Alessia Pierdomenico/Bloomberg

Italy Needs a Cure for Its Bad-Debt Headache

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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Italy's economy dragged itself out of recession this year, posting annual growth in gross domestic product of 0.8 percent in the third quarter. That, though, was only half the pace achieved by the euro zone as a whole. And unless the Italian government gets serious about tackling the bad debts that are crushing the nation's banking system, its economy will continue to underperform its peers.

Economists surveyed by Bloomberg News are only mildly optimistic about Italy's prospects next year. The consensus forecast is that growth will peak at 1.3 percent this quarter, slowing for the first three quarters of next year before rallying back to that high by the end of the year:

One of the biggest drags on the country's growth is the sheer volume of nonperforming loans, typically defined as debts that have been delinquent for 90 days or more. Italy's bad loans have soared to more than 200 billion euros ($218 billion), a fourfold increase since the end of 2008. Moreover, more and more borrowers have fallen behind even as the economic backdrop has improved. That's in sharp contrast with Spain, where bad loans peaked at the start of 2014 and have since declined by almost a third:

The figures for Italy are even more worrying when you compare them with the growth environment. The burden of bad debts is approaching half of what the economy delivers every three months. In the third quarter, for example, GDP was worth 409 billion euros while the banks were saddled with more than 200 billion euros of nonpaying loans. If that trend continues, Italy will soon be in a worse position than Spain, even though its economy is 50 percent bigger:

Here's the rub: If a euro-zone country's banks are weighed down with bad debts, the European Central Bank's attempt to boost growth and consumer prices by channeling billions of euros into the economy through its quantitative easing program is doomed to failure. And it's pretty clear that domestic investment in Italy isn't showing any evidence of recovery despite the ECB's best efforts:

Italy has made some progress on fixing its banks. Earlier this month, it approved 3.6 billion euro package to rescue four regional lenders that have been in the care of the Bank of Italy. Plans to establish a so-called bad bank or asset management company as a place to park the financial system's bad loans, however, have faltered thus far. Bank of Italy Governor Ignazio Visco said on Oct. 28 that those plans would be "conclusively verified" in a few weeks. But the country's Il Sole 24 Ore newspaper reported on Nov. 28 that an alternative proposal to create separate vehicles for each bank or group of lenders was being considered.

It's been more than seven years since the collapse of Lehman Brothers marked the worst of the credit crisis. So you might hope that the world of finance would have had time to mend itself and be fit for purpose in its key duty of helping the economy grow. In Italy, that hasn't happened. And unless the government accelerates the process of easing the bad-loan load on its banks, it risks damaging the economy's nascent recovery. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor responsible for this story:
Therese Raphael at traphael4@bloomberg.net