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Traditionally, the Eurozone’s GDP numbers of the second quarter of a calendar year are being released in the first few days of August, and this year isn’t any different. And as expected, the updated report contains some not-so-very-optimistic results.
Germany continues to be the main engine of the economy of the Eurozone, as the largest country of the bloc saw its GDP increase by 0.4% which is better than expected as the market was expecting a weaker growth result. Unfortunately Italy is once again stagnating and instead of a small economic growth of 0.2%, the economy’s growth rate fell flat and remained at exactly at the same level, indicating the program of monetary expansion of the ECB isn’t working just yet.
Source: Bloomberg
The lower growth rate (after realizing a GDP increase of 0.3% in the previous quarter) also caused both the International Monetary Fund and the Bank of Italy to revise their growth expectations as both institutions now expect the country’s economy to grow by less than 1% in the current year. That’s a very disappointing result as the quantitative easing program of the European Central Bank was predominantly aimed at reducing the impact of economic contractions in the poorer performing countries. But the situation might actually be even worse than you’d expect.
After all, Italy could be considered to be a semi-failed state, and the current prime minister, Matteo Renzi, was planning to push some reforms through after the summer recess of the country’s parliament. Reforms will definitely be necessary to try to the Italian economy going again, as it’s one of the very few countries remaining short of the pre-crisis levels of the GDP considering Italy’s GDP is still approximately 8% lower compared to the pre-crisis GDP numbers whilst the unemployment numbers are increasing again.
Source: iStat
And of course, the country is still battling to tackle its banking crisis after the stress test revealed the Banca Monte Dei Paschi would end up with a negative CET ratio using the adverse scenario. In a previous column, we also pointed out that Unicredit barely passed the stress test, and dozens of smaller banks will probably have either barely passed the stress test, or failed it, indicating the Italian banking system still is in a horrible shape, 7 years after the Global Financial Crisis.
The European Union has now installed the so-called ‘Single Resolution Board’ to enforce the rules for rescuing banks, and those rules are based on the principle of a ‘bail-in’ rather than a ‘bail-out’. Despite this, Italy had created a bailout fund, called ‘Atlante’ which was originally intended to soften the blows when the slow collapse of a financial system backfires. Unfortunately the few billion euro’s in the fund have already been used to rescue some smaller regional banks, and there’s nothing left in the till to protect as a cushion for the larger banks.
Source: Financial Times
Of course, Italy wouldn’t be Italy if it wouldn’t repeat its own mistakes, and the Atlante II fund is now being floated and has raised almost 2B EUR so far. The official estimates and expectations are to have 3B EUR by the end of the current quarter but it’s pretty uncertain if this will be sufficient to remove the fears of BMP’s ‘bad loan book’ containing 28B EUR of bad loans, or the 360B in non-performing loans on the balance sheets of the Italian banks in general.
The Italian economy is balancing on a very thin line between falling apart and being rescued. But it looks like all measures will be ‘too little, too late’, and the country could fall off a cliff either leading to or being caused by a political turmoil.
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