The Credit Crunch in Italy

The global downturn and the banking crisis together with slow productivity and a weak economy (its annual rate of growth is only 1.5% compared to an EU average of 2.2%) meant that Italy officially went into its worst recession in 30 years in the third quarter of 2008. But the signs are now pretty strong that she has come out the other side. According to Irwin Stelzer of the Hudson Institute “Economists at Goldman Sachs expect the Italian economy to grow 1.6% next year.”

Italy’s conservative banks are considered fairly healthy compared to some of their counterparts. No Italian banks have had to be propped up by government intervention and no banks have closed. But because these banks deal internationally they have been affected by the worldwide recession and the difficulties of the inter bank market, resulting in tighter lending.

Italian Attitude to Debt

In Italy the attitude to borrowing and debt is very different to that of the UK and the USA. For instance, the credit card culture is at a very early stage with prepaid cards or debit cards far more popular than conventional credit cards. The mortgage market too has been fairly slow to take off as many Italians rent or live with their families to save money.

In one way, this places the ordinary Italian in a much stronger position to weather the downturn than his British counterpart, where the average UK adult owes £30,226 including mortgages, representing 133% of the average earnings. (Source: Credit Action, based on Bank of England figures). Compare this to Italy where the average household debt is 49% of disposable income, the lowest in the western world. (Source: EUObserver.com)

The pension reforms implemented as a response to Italy’s aging population has meant that people are investing more in private pension schemes. The country has a huge amount of private savings, which act as a counterbalance to the large national debt.

Italian Business

The country is heavily dependant on exports and these have fallen heavily since the economic downturn. The figures for 2009 showed a 21% drop in exports but this is counterbalanced by the increased unit value of Italy’s exports particularly in the luxury market, known as ‘the Gucci effect’.

In business terms, the last year has seen a sharp drop in lending to SMEs. This has had an impact on the Italian economy as the country has the largest percentage of SMEs in Europe which employ around 52% of the Italy’s working population. The SMEs often rely on banks for funding and there has been an increase in the number of loans rejected and a decrease in loans to these small and medium sized businesses over the past twelve months. This has hit the south of the country more than the centre and north.

There has been a corresponding effect on the labour market with the highest rate of unemployment since 2004 and this is expected to worsen in 2010, something the government hopes to head off by a series of measure to boost short term employment. The news is not all bad. According to the latest figures from Eurostat, Italy’s economy grew by 0.6% in the third quarter of 2009. To quote again from Irwin Stelzer’s article in the Wall Street Journal: “Goldman Sachs says that…with a savings rate slightly above 14% and mortgage debt that is a modest fraction of real disposable income, Italian households remain among the least leveraged of the euro zone.”

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