Download Public Guarantees on Bank Bonds: Effectiveness and Costs

The Bank of Italy’s Financial Stability Report:
The Italian economy moving forward?
Sergio Nicoletti Altimari
Bank of Italy – Financial Stability Unit
Roma, 30 November 2011
1
The macro-financial context
 A sudden worsening of the outlook for global growth since last summer
has heightened fears for the soundness of heavily indebted borrowers,
public and private alike
 Concerns are emerging that the phase of weakness will persist, in
particular as a consequence of the deleveraging process of the public
(necessary consolidation measures) and private sectors (banks, but also
households and firms; Figure)
 The sovereign debt crisis in Europe has spread to Italy and Spain; other
countries are also coming under stress (Belgium and, lately, even
France; tensions are emerging for Austria; Figure).
 The difficulties encountered by the authorities at the national and supranational level in implementing suitable countermeasures are playing a
significant part
2
The Italian situation
 The increase in risk aversion has hit especially those countries with a
high public or private debt. For Italy, key weaknesses are high public debt,
track record of poor growth performance
 But Italy can count on a series of strengths:
1. Steady trend towards consolidation of public accounts
2. Relatively low level of foreign debt
3. No clear signs of imbalances in the real estate markets
4. Low level of private debt
5. Overall sound banking system
3
1. Fiscal consolidation
 Italian fiscal policy during the crisis has been prudent. The
government did not have to intervene to bail out banks.
 Italy among very few countries with a primary surplus. New
measures will be necessary to reach a balanced budget in 2013.
Public debt/GDP ratio should start declining in 2013 (2012 in
governments’ estimates; Table)
 Forward-looking indicators of fiscal sustainability that take into
account the increase in age-related expenditures are relatively
favorable (thanks to pension reforms since mid 1990s) (Table)
 Thanks to the long duration of its debt (over 7 years), and provided
that public finance targets are fully met, Italy’s debt-to-GDP ratio
should decline or stabilize over the next three years even if interest
rates were to undergo a further, sharp increase (Figure)
4
2. Relatively low level of foreign debt
 Italy’s net international investment debtor position is 24% of GDP,
higher than euro area average (13%), but well below that of the
euro area countries under stress (Table)
 Italy’s balance of payments has worsened since the mid-90s mainly
on trade, owing to a progressive loss of competitiveness.
 But exports have been one of the main determinants of growth. Our
estimates indicate that the current account deficit should diminish
considerably in the next years. Fostering Italian competitiveness
remains a priority
5
4. Private sector: Households
 Italian households are financially sound. Total net wealth is 8 times
disposable income; gross financial wealth is 3.4 times. Debt is modest:
66% of disposable income (around 100% in the euro area; 120% or
more in the US and the UK (Figure)
 70 per cent of outstanding mortgages are at variable rate, linked to the
Euribor, which is supposed to decrease in the next months.
 Spreads on new mortgages are increasing reflecting the higher cost of
bank funding. However, the share of household loans that are going to
expire in the next two years is relatively low (less than 30%)
 Problems may emerge for low-income indebted households; risk for
banking system are however limited, as these households hold a very
limited portion of bank loans (10-12% of the total)
RISKS are overall low
6
4. Private sector: Non-financial firms
 Italian firms’ financial debt is relatively low (Figure)
 However, the weakening of economic activity is taking its toll:
 In June 2011 gross operating profit grew by 1.4% (3.3% last
December).
 Borrowing requirement rose, as growth in self-financing failed to
keep pace with that in capital spending
 Business surveys point to expectations of a decline in activity and
a worsening of credit conditions.
 Italian firms are vulnerable to interest rate risk, owing mainly to the
high proportion of short-term debt (some 60 per cent of their debts to
banks have a maturity of less than two years),
 KEY RISKS are due to a decline in activity and to tighter bank lending
conditions due to current strains in bank funding
7
5. Banks: funding & liquidity
 Sovereign debt crisis is affecting European banks: widening of
CDS spreads. Exposure to weak sovereign very limited. However,
exposure to the national sovereign is large (Table). CDS exposure
is negligible (Figure).
 Impact on cost and availability of wholesale funding. Increasing
refinancing at the Eurosistem. However, Italian banks’ funding with
retail customers (least sensitive to market movements) is high if
compared with other euro area banks (Figure)
 Major Italian banks’ refinancing needs in 2012 (24% of the bonds
outstanding) in line with average for large banks in Europe
(Figure).
 Economic slow-down clouds the outlook for credit quality,
notwithstanding signs of amelioration in 2011.
 KEY RISKS: Refinancing risk, shutdown of wholesale markets
(common to Europe); sovereign risk. Problems: low profitability
8
5. Banks: capital
 Significant fresh capital injections ahead of the July European stress
tests. Strengthening is proceeding further, in line with EBA initiative
(major European banks must reach a 9% Core tier 1 ratio by June 2012,
after taking into account sovereign exposures).
 Italian banks’ leverage (total assets/Tier 1 capital) is lower than the
European average (19 vs 29)
 Core tier 1 ratio for the largest 14 banks stood at 8.5% in June 2011
(7.5% in Dec 2010). Unicredit has recently announced a capital
increase of 7.5 billion euros.
 Measures agreed at the European level are part of a package that will
include public guarantees schemes on medium-term funding.
 Looking ahead, recouping profitability is key in order to further
strengthen banks’ capital positions.
9
Conclusions
 Global tensions have affected Italy. Italy is suffering from high public debt
and low growth, but has a series of strengths (prudent fiscal policy, low
private debt, no real estate bubbles, limited foreign debt)
 The Italian banking system is not a source of instability. Banks’ capital
position significantly strengthened in 2011. This action is proceeding
further, in parallel with European initiatives
 Italian banks are affected by the sovereign debt crisis. Exposure to
program countries is very limited, but exposure to domestic sovereign is
sizeable. Tensions in liquidity and access to market funding, in line with
other European banking systems
 To overcome sovereign crisis and preserve financial stability:
 Further fiscal consolidation
 Credible policies for sustained economic growth
 Initiatives at the EU level
10
Deleveraging in the private sector
Private sector debt
Households
Nonfinancial companies
(% of disposable income)
(% of GDP)
(BACK)
Figure 2
10-year interest rates in the euro area
16
16
14
14
12
10
8
Germany
France
Belgium
Spain
Italy
Ireland
Portugal
12
10
8
6
6
4
4
2
2
0
31/12/09
31/12/10
0
31/12/11
Source: Bloomberg.
(BACK)
Financial sustainability indicators
(BACK)
Financial sustainability indicators
14
(BACK)
Financial sustainability indicators
15
(BACK)
Financial sustainability indicators
16
(BACK)
The dynamics of Italy’s public debt
(BACK)
The real estate market in Italy
House prices and sales
(indices, 2005=100)
(BACK)
The real estate market in Italy
Affordability of housing and ratio of house prices to rents
(semi-annual data; indices, 1992/2009 average =100)
(RHS)
(LHS)
(BACK)
Households’ gross financial assets
(as a ratio to gross disposable income)
5,0
5,0
4,5
4,5
4,0
4,0
3,5
3,5
3,0
3,0
2,5
2,5
2,0
2,0
1,5
1,5
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
France
Spain
United States
Germany
Euro area
Italy
United Kingdom
(BACK)
Households’ debt
(as a percentage of disposable income)
180
180
Mortgage loans
Consumer credit
Other loans
150
150
120
120
90
90
60
60
30
30
0
0
2002 2010 2002 2010 2002 2010 2002 2010 2002 2010 2002 2010 2002 2010
Italy
France
Germany
Spain
Euro area
United
Kingdom
United
States
(BACK)
Bank loans by residual maturity
(as a percentage of the sector total)
80
80
Up to 1 year
From 1 to 2 years
More than 2 years
70
60
70
60
50
50
40
40
30
30
20
20
10
10
0
0
Households
Total economy
(BACK)
Non-financial firms’ financial debt
(as a percentage of GDP)
150
120
150
2007
2010
120
90
90
60
60
30
30
0
0
Italy
France
Germany
Spain
United
Kingdom
United
States
(BACK)
CDS spreads of major European banks
(BACK)
Composition of banks’ fund-raising
(percentages at June 2011)
(BACK)
Major Italian and European banks’ bonds
maturing by the end of 2012
(billions of euros and percentages)
(BACK)
Lending and credit quality
(BACK)
Consolidated exposure of Italian banks
Vis-à-vis euro-area residents
(BACK)
Net CDS exposure on Greek, Irish and Portuguese
government securities
10
10
5
5
0
0
-5
- 5
-10
-10
-15
-15
2011
2010
United Kingdom
United States
Source: DTCC
(BACK)