Italy’s bad loans soar to all-time high

For the last twelve years, Italian banks have been suffering from an all-time high of bad loans as the country faces its longest recession.

Hurt by a weak economic cycle and the worsening financial condition, major banks’ credit quality is continuing to worsen, economic experts said.

According to a report from Italian Banking Association, the gross non-performing loans as a proportion of total lending increased to 6.4 percent in January from 5.4 percent last year. This is considered to be the highest recorded gross non-performing loans since September 2000.

Last week, Unicredit and Intesa San Paolo, the country’s biggest banks, struggled to boost their profit because of a bureaucratic impasse that threatens to increase borrowing costs and drive up more bad loans.

Measures Put Up To Prevent Financial Slump

Despite the austerity measures placed, companies and families are having a difficult time in repaying their debts and in finding new credit lines because of the rising unemployment.

Analysts believe that the Italian economy would shrink to 1.1 percent this year after it contracted 2.2 percent in 2012.

In January, non-performing loans raised an annual 18 percent to 126.1 billion euros. However, analysts say they expect bad loans to increase until the Italian economy starts recovering. The central bank is urging banks to take more loan provisions. The Bank of Italy has reviewed the top 25 banks to increase the non-performing loan coverage.

Electoral Stand Off

The political stalemate in Italy may cripple the economic growth of the nation after tough regulations will be upheld. The Bank of Italy already forced banks to set aside more money against doubtful loans.

Because of this, analysts believe the Italian banks’ profitability and capital generation will continue to deteriorate and the nation’s political uncertainty adds pressure to it.

The events in Italy have affected the borrowing costs in the country and other surrounding nations. Relative yields on bonds sold by financial companies from Greece, Italy, and Ireland jumped 11 percent since Feb. 25 to an average 357 basis points on March 4.

The difference between their funding costs and those of financial firms in the region’s so-called core nations, including France and Germany, is holding near the widest since Dec. 28.

Analysts say that the Italian economy’s financial decline began in 2012, after an increase of the country’s sovereign debt by 58 percent to 331 billion euros. The nation has 2 trillion euros of debt and has more share than any developed country.