Photo: Sean Gallup/Getty Images
Despite new prime minister Mario Monti’s efforts, Italy’s outlook hasn’t improved much since he took the helm.Last month, Fitch downgraded Italy’s credit-rating by two notches to A-, and attributed the downgrade to a “permanent upward shift” in it’s cost of fiscal funding and its implications for long-term public debt dynamics.
It also attributed the downgrade to potential financing and monetary shocks, as the monetary and credit conditions of EU nations continued to diverge.
While Italian government bonds have been recovering in response to the ECB’s successful three year long term refinancing operation (LTRO), the country’s output has been contracting, unemployment has been rising, and banks are getting stricter about lending. And Societe Generale analyst Vladimir Pillonca has pointed out four worrying signs to watch for:
- Non-performing loans have been rising sharply, since before the recession started in Q3 2011. So far this has been seen in households, but if the recession deepens this will be seen in non-financial corporates as well. At the same time, access to credit has been tightening.
- Italian GDP shrank by 0.2 per cent quarter-over-quarter in Q3 2011, led by a fall in domestic demand. GDP is expected to contract for several quarters to come. For 2012, SocGen expects GDP to fall 1.6% year-over-year.
- While Italian policymaking has improved under Monti, the country still resists structural changes. labour reform has been most divisive.
- Easing sovereign and funding pressures has given Italy a window of opportunity to recover its growth rate. But as the recession deepens, that window will start to close.
Now here is a chart from SocGen that show’s the sharp rise in Italian non-performing loans:
Photo: Societe Generale
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