If you found Brexit to be an unconscionable challenge for the European Union then consider the eurozone rules driven by Germany that may eventually undermine the Italian banking system states Tim Worst all of the Adam Smith Institute in London. It seems to be a matter of who came first the chicken or the egg. The chicken could be the numerous Italian banks who have given out bad housing loans and the eggs in this case being the numerous investors who have borrowed in the wake of weak economic growth.
The German government wants to abide by euro-zone rules and provide rescue loans to Italian investors to regenerate the economy and are unwilling to bail-out the creditors’ slowly asphyxiating under a burden of €360 billion non-performing loans. The Italian banking crisis is being considered as a far more serious event than Brexit, by many economists.
One of the main culprits behind Italy’s banking crisis is bad investments in construction and real estate that make up the largest proportion of bad debt. As much as 40 percent of all corporate loans are non-performing with the number being on the rise.
Since 2010 real estate prices have been declining bringing a slump in the housing market. This has impacted the banking sector deeply having as much as two thirds of the loans based on housing collateral while the exposure for smaller banks being as much as three quarter.
The former director general of Italian Treasury, Lorenzo Codogno has cautioned that the Italian market for real estate is on a down turn dependent upon the rise in the households’ real disposable incomes for recovery.
Economic activity in the Italian corporate sector has been weak burdened by €287 Billion worth of bad loans along with €61 billion of bad loans being held by consumer households.
The exposure to non-performing loans has affected the share prices of Italian banks. The British referendum drove share prices of Monte dei Paschi di Siena having a one third exposure to bad loans down by 50 percent.
According to a recent IMF Report the Italian economy has to recover and the banks need to recover to augment lending and catalyse this recovery via augmented investment lending.
Restructuring of banking and a commitment by Italy speeding up the process of insolvency for non performing loans has helped strengthen the process of recovery.
The effect of Brexit will be a negative one on the Italian economy as per Mr Codogno as the drop in Bank shares will weaken the banks leverage to raise capital in the European markets.