Against a backdrop of collapsing property prices and soaring volume of non-performing loans, it is perfectly understandable that the focus of attention of European policy-makers and asset markets has been Spain. Indeed, at the G20 meeting, German Chancellor Angela Merkel urged Spain to clarify its aid request as soon as the results of the bank audits were known.
However, it is important to recognise that the deterioration on the assets side of the balance sheets of Italian banks is no less serious. According to figures released by the Bank of Italy, corporate and household bad debt jumped by 15% to EUR 109bn in the year ended April. Impaired loans – not including those already written-down – increased to EUR 58bn from EUR 50bn a year earlier.
With the economy stuck in recession once more, and local property prices suffering, the direction of travel for non–performing loans can only be upwards. Morgan Stanley recently published an estimate claiming that Italian banks required a capital injection of up to EUR 42bn in response to the surge in bad loans. Recall that Moody’s downgraded 26 banks last month because of concerns regarding poor earnings, bad loans and the faltering economy. The chances are these concerns are unlikely to go away anytime soon.
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