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The current economic problems in Italy do not seem to disappear soon. In theory, the country's bad debts could reverse the European banking system and slow global growth.
At the fundamental level, Italy poses a threat to an already volatile euro area. Italian banks are struggling with billions of bad loans, largely governmental, and fears of contagion are never far away. The euro area includes the 19 countries that use the euro as currency under the auspices of the European Central Bank. The ECB is obliged to ensure that none of its countries are in default. According to badyst Jack Allen of Capital Economics, badyst Jack Allen poses the following question: why would the healthy economies of Northern Europe, like Germany, continue to to support Italian debt which, technically, risks being in default for years or even decades?
"Over the next ten years, we believe that the Italian economy will fail to grow because productivity growth will remain low and the total number of jobs will fall." Public debt will likely continue to increase and will eventually prove unsustainable – a problem that the previous eurozone crisis and could once again endanger the single currency itself, "Allen said recently to his customers.
A similar situation occurred in Greece after the 2008 financial crisis. This country was paralyzed by its own inability to pay its debts. The crisis was contained because the Greek economy is relatively small. Italy, on the other hand, is the ninth largest economy in the world and is at the heart of the European economy.
A recent IMF report states that "potential losses on non-performing loans and declines in the value of government bonds valued at market value could have a significant impact on the capital of some banks".
The country's problems were the subject of much publicity after the arrival of a new populist government last year and the ensuing battle with the European Commission to get its approval approved. budget.
Italian banks have about 800 billion euros of public debt and many of them have risky loans in their balance sheets. Italian institutions hold about 8% of non-performing loans in Europe, according to figures from the European Banking Authority at the end of 2018.
After Italy, French banks are the most exposed to Italian public debt, with some 285 billion euros ($ 323 billion) held by major lenders such as Crédit Agricole and BNP Paribas. According to Bloomberg, about $ 481 billion of Italian public debt was held in non-Italian banks in June 2018.
It reinvents fears of a "deadly loop" in which governments are struggling to protect banks whose profits are affected by falling value of government bonds because of their inherent weakness.
"A prolonged period of high yields in Italy would put more pressure on Italian banks, weigh on economic activity and exacerbate the debt dynamics," the IMF added. Attempts by European institutions to boost lending have been unsuccessful for Italy.
The country has absorbed about one-third of the 724 billion euros ($ 817 billion) in "longer-term targeted refinancing operations" – a low-interest loan product designed by the ECB to promote loans – but still experienced a contraction in corporate loan demand, according to Financial Times reports.
Things are not going to improve anytime soon either. The IMF has reduced Italy's growth prospects from 0.1% to 0.9% this year. The country's stagnant economy and relatively high bond yields put the country in a precarious fiscal position, Oxford Economics wrote in a recent research note.
Poor productivity growth in the country could push Italy's public debt ratio to unsustainable levels. Jack Allen suggested that Europe's economic laggard could end up in a "permanent recession", which could have more serious consequences than the previous eurozone crisis.
One of the few strengths of the Italian economy is the fact that the March Purchasing Managers' Index reached its highest level since September 2018, with new orders recording their strongest growth in six months, according to reports. IHS Markit data.
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