Italy’s bad bank won’t have the expected impact on Italy’s economy

The 200 BN Euros of non-performing loans, in all the Italian banking system, is the number that decisively has pushed the Italian government to intervene in the banking system. After years of rising non-performing loans, after the vanish of the hope, to see a change of course in the bad loans, after that many European countries have nationalized many private banks, Italy decided to move a step forward through its Sovereign fund, Cassa dei Depositi e Presiti.

This public and national fund with a triple A rating will provide a large guarantee over 70 to 80 percent of the bonds that will be issued by the new companies, to buy the nonperforming loans of many of the major banks of Italy. The debate about the numbers of these new companies is still going on, but most likely, there will be more than one. Around 20 to 30 percent of the new companies’ funds will be injected by the private sector through capital rising.

Somehow, Italy hopes this balance sheets clean up of the banks will boost the credit emission to the small and medium companies that are suffering from the lack of credit. Italy’s producing system is largely composed by small and medium companies which have strong difficulties to finance their projects through the capital market. The banking system is the only one that can keep alive these small entities.

However, according to our point of view this is only a small problem amid the big problems of Italy’s economy. Probably these bad banks that will be created will keep functioning some of the major banks of Italy but won’t improve as much bank’s net-interest-margins. Operating in a negative interest rates’ economy is becoming tough for Italy’s banks. In the past few weeks only, we have heard the major banks of Italy planning huge job cuts. This is inevitable because of the low net-interest-margins. The health of Italy’s banks will continue to deteriorate further, despite the balance sheet cleaning.

To see these banks performing, first we need to see performing better the economy in which the banks operate.  There are many reasons why Italy’s economy has been performing so bad in the last decade and the banks haven’t been one of those problems. Italy has a strong tradition on the banking system and  banks have for long time been a strong landmark for the development of the country, but actually in such a general bad economic environment, the banking system can’t materialize the miracle the central government expects.

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