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Euromonitor International’s Italy Economy, Finance and Trade Country Briefing, focuses on Europe’s fourth largest economy (in US$ terms), which is undergoing a banking crisis, given poor capital ratios and a high propensity of loan defaults. After three consecutive years of protracted recession, the Italian economy witnessed slow recovery in 2015, which was driven by higher private consumption expenditure, low energy prices and prudent macroeconomic policies. However, economic recovery remains weaker than its regional peers. Additionally, excessive public debt levels and waning competitiveness could weigh on an already jittery economy’s overall output. Furthermore, being a major player in the region, worsening of Italy’s banking crisis could flatten the eurozone recovery.
In 2015, the proportion of nonperforming loans to total gross loans was the third highest in the eurozone, after Cyprus and Greece. This has resulted in a large sell-off of bank shares that has been further exaggerated by the ‘Brexit’ vote in 2016 and is impeding banks from lending. Furthermore, Italy’s banking crisis could be aggravated by continued cuts in interest rates, which could further hamper banks’ profits. The results of the stress test published by the European Banking Authority (EBA), in July 2016, have also confirmed the continued weakness in Italian banks, particularly the Banca Monte dei Paschi di Siena (one of the oldest and largest banks in Italy). The new EU rules in place since January 2016, has shifted the liability of rescuing stressed banks away from taxpayers and on to investors and this has complicated the situation even more. Thus, the government is looking for measures to resolve this issue in order to avoid a political crisis. Moreover, there are talks regarding the government’s plans on launching a €40.0 billion fund to rescue its banks, however, it has not been confirmed yet and remains ambiguous. Therefore, if Italy’s banking crisis is not resolved in time, there are fears of it spreading across Europe and disrupting the eurozone’s recovery.