How Brexit has helped to expose Italy’s banking malaise

Brexit has triggered a financial chain reaction that has also exposed the problems of the Italian banking system.

How Brexit has helped to expose Italy’s banking malaise
Italy's government, led by Matteo Renzi, has not been able to intervene directly with public money due to huge public debt. Photo: Tiziana Fabi/AFP

The UK’s decision to leave the EU made investors fearful that the union would face a new crisis or even break up. This led to a swift withdrawal of their funds from the most fragile sections of Europe’s financial markets.

Italian banks are one of these areas. The graph below shows the steep fall of Italy’s FTSE Italia All-Share banks index following the UK’s referendum result.

The main problem with Italy’s banks is that they are swamped with what are known as non-performing loans (NPLs). These are loans on which debtors have not made scheduled payments for at least 90 days.

In other words, Italian banks are not getting back some of the money they have lent out. According to data from the Bank of Italy, NPLs of Italian banks amounted to €360 billion in 2015, or 18.1% of all loans they made (see graph below). Of these loans, €210 billion are really bad and no longer collectable. The remaining €150 billion are of slightly higher quality.

Italian banks are incredibly exposed to NPLs. They equal almost a quarter of Italy’s GDP and a third of the total NPL exposure of EU members. Practically speaking, NPLs are a big drag on the ability of Italian banks to finance investments and growth in the real economy. Accordingly, it is a major threat to the stability of the entire EU.

The NPL problem has its origins in the seven-year recession that followed the 2008 global financial crisis and the ensuing European sovereign debt crisis. The reason is simple: if the economy does not go well, companies and households struggle to repay their debt to the banks.

However, another cause of the NPL problem is the fact that Italian bank managers also made bad investment decisions, often allocating loans on the basis of favouritism. Hence, it would not be an exaggeration to say that an independent inquiry on the issue should be established, a sort of NPL audit which should be open to independent experts and civil society.

Government incapacity

Another cause of the NPL crisis is the Italian government’s inability to solve the issue, as other European countries have. Germany and France for example intervened directly with state funds to provide new capital to their banks, thanks also to relatively more solid public finances.

Ireland and Spain have instead used bad banks co-funded by both state and private investors. These so-called bad banks use these funds to buy other financial institutions' bad loans. They focus on managing the non-performing assets, for instance by trying to recover the money from borrowers. The other institutions, relieved of their bad debts, can instead healthily resume their normal activities of lending and borrowing. Direct state bail-out and bad banks are not mutually exclusive solutions. In fact, they are often used together.

In the case of Italy, the government could not intervene directly with public money. Italy’s huge public debt does not give fiscal space for substantial public funds going to struggling banks. Some exceptions were made for several banks including Banca Monte dei Paschi di Siena in the period 2008-2012.

More importantly, by the time the Italian government decided it would do something about four small troubled banks in 2015, new EU rules, including a bail-in, were already on their way to being fully implemented. These dictate that when a bank is in crisis, its creditors – bondholders and depositors together with shareholders – would bear the burden by having part of the debt they are owed written off. This was so that governments could avoid rescuing banks using taxpayer money.

To cut a long story short: Italy’s banks are in a dire enough situation to require direct state intervention, but this cannot be done under current EU banking regulation. As a result, the Italian government is negotiating with the European Commission to develop alternative and more complex solutions which avoid relying on taxpayer money. Unfortunately, these would merely keep the banks alive, but do not thoroughly restructure their governance and business strategies so that they could start lending again.

At this point, the most appropriate solution would be to inject public capital into the banking system under strict conditions which impose a more effective governance and business strategy on the bailed-out banks. The Swedish case in 1992 shows that banks can be held responsible and the government can become an owner. What is more, the Swedish government was also able to make a profit once it sold the shares of the banks later on.

Direct state intervention would prevent small investors from having their savings wiped out. These retail investors hold a third of all bonds issued by Italian banks, but are not always fully aware of the risks their bank managers exposed them to. More generally, direct state intervention would help kickstart economic growth in a country that so desperately needs it.

Andrea Lagna, Lecturer in International Business, Strategy and Innovation, Loughborough University

This article was originally published on The Conversation. Read the original article.

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Where in Italy are house prices rising fastest?

Property values are expected to continue rising overall in Italy in 2023, but the situation looks much better in some cities than others. Here's how average prices compare.

Where in Italy are house prices rising fastest?

Until 2020 Italy’s real estate market had long suffered stagnation, weighed down by a large number of old, neglected properties which were proving difficult to sell.

But the pandemic turned Italy’s property market on its head, leading to the first increase in house prices for years at the end of the first quarter of 2020.

This trend has held up since, and industry experts cautiously predict further price growth in 2023 – albeit more modest than previously hoped.

Factors putting the brakes on growth include the soaring cost of living eroding households’ purchasing power, rising mortgage interest rates, the soaring cost of building materials, and a shrinking economy.

REVEALED: Where in Europe have house prices and rent costs increased the most?

Mortgages are also expected to become more difficult to obtain in 2023, meaning fewer people able to make a purchase.

But despite the gloomy picture overall, the outlook varies significantly around the country and some cities are expected to see a significant rise in prices this year.

Milan remains by far the most expensive major Italian city for a property purchase, but prices are rising faster elsewhere. Photo by Ron Dylewski on Unsplash

A recent report from Idealista Insights, the property search portal’s research team, looked at changes in the average prices per square metre in property listings in Italy’s biggest cities.

In 2022, the price per square metre “generally increased throughout the country, with ‘exclusive’ neighbourhoods becoming even more inaccessible to the average buyer,” the report found.

But, while bigger northern cities saw rising prices across the board, most southern cities were struggling with “stagnation”, it said.

Based on Idealista’s data, here are the ten most expensive cities to buy property in Italy, in order of the rate at which prices are rising.

  1. Genoa: the Ligurian capital is Italy’s tenth-most expensive city to live in – but prices here are rising faster than anywhere else on average, according to Idealista. An increase of 4.5 percent is forecast for Genoa in 2023, meaning the price per square metre will go from 1,602 to 1,674 euros.
  2. Bologna: Bologna records the second-highest price increase in Italy compared to 2022. The citywide average price per square metre will rise by an estimated 3.9 percent, reaching 3,419 euros.
  3. Verona: in seventh place we find the city of Romeo and Juliet, where the increase in prices is substantial, equal to 3.2 percent. The average cost will rise by around 80 euros per square metre, going from 2,483 to 2,563 euros per square metre.
  4. Milan: Italy’s economic capital will easily remain the most expensive city for property purchases, with prices set to rise by 2.9 percent compared to 2022. The average price per square metre is expected to exceed 5,300 euros, 150 more than now, with significant price variation between city districts.
  5. Bari: The capital of Puglia in the south-east is set to record an price increase of 2.8 percent, with the citywide average price per square metre going from 1,909 euros to 1,962 – making it the ninth most expensive Italian city in which to buy property and the only southern city to record a significant increase. 
  6. Turin: The northwestern city can expect an overall price increase of 1.5 percent, equal to around 30 euros more per square metre for a final price of 1,979 euros on average. 
  7. Florence: The Tuscan capital still has the second-highest prices, and can expect an average price increase of 1.4 percent, with the cost per square metre to rise from 4,128 to 4,184 euros .
  8. Rome: The capital may have some highly sought-after and expensive districts, but overall average prices will remain at around 3,336 euros, up slightly from 3,360 in 2022. This is equal to an increase of just 0.76 percent.
  9. Venice: La Serenissima remains the fifth-most expensive city to buy property again this year as the average price will remain almost unchanged with a reduction of -0.3 percent, meaning the cost per square metre will be around 3,090 euros.
  10. Naples: The southern capital is set to go against the trend, with a -1.5 percent drop in house prices expected. This means the average price per square metre will go from 2,737 to 2,696 euros, a difference of 41 euros.