Keyword: resilience. In the space of a few weeks, the scenario of the European economy and, in particular, of the Italian economy found itself having to deal with an unexpected surplus of uncertainty and risks which could constitute a non-trivial stumbling block in an already complex context. The outcome of the referendum with which the British electorate chose Brexit has increased global risk aversion.
Among the investment classes considered to be riskier, the focus of the markets was concentrated on banks, and in particular on Italian banks. The outcome of the stress tests conducted by the European Banking Authority and released on 29 July allows us to resize and qualify the alarm. Above all, the stress tests provide the elements for distinguishing individual problems from generalized syndromes which, in the horizon of Italian banks, do not emerge from the objective comparison of the numbers.
In a static European comparison and referring only to outstanding amounts, Italian banks show significantly higher levels in the percentage ratio between non-performing loans and total loans. This is a condition known for some time, which crystallizes two different elements. Firstly, there is the effect of eight years of almost uninterrupted recession, of a fall that still today places the quarterly volume of Italian GDP eight points below the value of the spring of 2008.
For comparison, UK GDP is seven points above today. So much recession, so much suffering. But also, many non-performing loans remain today in the accounts of Italian banks because practically no help has reached Italy from public finance. This is the second, fundamental, factor that explains the Italian anomaly of the NPL ratio.
Unlike us, in the years in which aid was permitted, other countries issued significant amounts of public debt to activate the recovery of the financial systems and alleviate the burden of suffering. As at 31 December 2015, according to Eurostat data, the public debt issued in Europe for interventions to support the financial systems amounted to a good 633 billion euros, of which just 2 billion pertaining to Italy.
One wonders how much lower the ratio of non-performing loans to total loans would be today if even in Italy it had been possible to carry out support interventions of similar dimensions to those carried out elsewhere, from Germany to the United Kingdom. In any case, a serious analysis of the context and prospects of Italian banks cannot disregard this "levelling" of the playing conditions that has historically occurred.
Just as the consideration of the massive aid implemented elsewhere in the years between 2008 and 2012 is useful for understanding the genesis of the European turnaround in the regulation of bank crisis resolution, from bail-out to bail-in.
The past is the past. Today, it is important to go beyond the static question of stocks to understand whether or not Italian banks continue to suffer from a dynamic problem of generating new non-performing flows. The findings in this regard are encouraging. Data from the Bank of Italy indicate that the growth rate of new impaired loans has halved in the space of just over two years.
The same signals come from the July edition of the "EBA dashboard", the quarterly monitor of the European Banking Authority, which shows how the NPL ratio has decreased in Italy in recent quarters substantially to the same extent as in the other main European banking systems . Once the stress tests have been archived, the main challenge for banks in Europe and not only in Italy remains that of profitability.
Dynamically, the ability to generate profit and to remunerate capital is the main foundation of banking stability. Again, the numbers from the July edition of the EBA Dashboard show that a profitability deficit currently affects all banking systems, not just ours. In the first quarter of 2016, the average ROE of the banks monitored by the EBA stops at 3,3% in Italy, but is even lower in Germany (2,6%).
Making profits in a scenario of low rates for a long time is not easy for anyone. We need to reinvent ourselves. Paradoxically, assuming that the deceleration of new non-performing loans continues in Italy and that old and new structural interventions actually unleash their effects of shortening credit recovery times, the disposal of the high stock of NPLs of Italian banks will also be able to contribute to monitor profitability.
Even before that, a solid prospect of economic recovery is needed to tone up the outlook for bank accounts. This prospect of a solid recovery depends, in turn, on the fiscal policy "stance" or rather on the ability of the public finance maneuver to mix the objectives of stability and that of development in a balanced and forward-looking manner. It depends on Italy, but also on Europe.
Between 2008 and 2015, the Italian public deficit was on average equal to only 3,4% of the national GDP: this is a much lower value than what was achieved by all the other major economies in the euro area, with the exception of only Germany. By way of example, on average, the Italian public deficit has been about five points of GDP lower than the Spanish one every year.
The greater rigor is the price we paid for having entered the age of the Fiscal Compact with a public debt-to-GDP ratio higher than that of the others. It was a very high cost, of which today we are discounting more than one effect, not least that relating to the higher values of bank NPL ratios. Eight years of crisis experienced with little counter-cyclical support have led the Italian economy and its financial system to operate in an almost permanent "stress test" condition.
Painful times, but also an opportunity to start a process of structural change of the system which must now be carried forward to recover competitiveness, productivity and work.
Also in the field of European public finance it is necessary to know how to look ahead. The decision at the end of July by the European Commission not to propose any immediate sanctions against Spain and Portugal due to the persistence of a public deficit exceeding 3 percent of GDP is good news, even for the more disciplined Italy. It is the confirmation that pragmatism, competence and foresight can be used in applying the rules of the Fiscal Compact.
Not stopping at a single parameter, or at the current moment, but knowing how to look back and forward, in history and in geographies. The prospects for resilience of the European economies, beyond Brexit and the stress test, depend on this balancing act. The appointment is for September, with the budget proposals for 2017.
