Ital­ian ‘doom loop’ threat to UK econ­omy

Bank of Eng­land warns that prob­lems at lenders in Italy could af­fect Bri­tain’s fi­nan­cial sta­bil­ity

The Daily Telegraph - Business - - Front Page - By He­len Chan­dler-Wilde

A FRESH bank­ing cri­sis in Italy could spark a dev­as­tat­ing “doom loop” that threat­ens UK fi­nan­cial sta­bil­ity, the Bank of Eng­land has warned.

Bank of­fi­cials are concerned that prob­lems af­fect­ing Ital­ian lenders could spread across the Euro­zone and even­tu­ally be trans­mit­ted to the UK econ­omy through French and Ger­man banks, which have mas­sive ex­po­sure to Italy.

Big French banks own tens of bil­lions of Ital­ian sov­er­eign debt. BNP Paribas had €9.8bn (£8.7bn) at the end of 2017, BPCE had €8.5bn and Crédit Agri­cole €7.6bn. UK fi­nan­cial in­sti­tu­tions own very lit­tle Ital­ian debt but they have “much higher claims on coun­tries with close links to Italy, in­clud­ing France and Ger­many.”

“Al­though di­rect UK bank­ing ex­po­sures to Italy are low, if fi­nan­cial strains were to spread across the euro area, there could be a ma­te­rial risk to UK fi­nan­cial sta­bil­ity,” the Bank said.

Yields on sov­er­eign debt in Italy have spiked af­ter po­lit­i­cal un­cer­tain­ties in the coun­try, ris­ing to the high­est lev­els in over four years in Oc­to­ber, af­ter the coali­tion gov­ern­ment pub­lished a draft bud­get which in­cluded tax cuts and spend­ing in­creases.

Ital­ian gov­ern­ment debt is al­ready over 130pc of GDP, more than dou­ble the 60pc limit set out by the EU. Some are wor­ried about the emer­gence of a “doom loop” in the coun­try, where fi­nan­cial is­sues can lead to prob­lems with sov­er­eign debt, and vice versa. Ital­ian bad debts al­ready ac­count for a quar­ter of all of th­ese loans in the euro­zone.

Some banks may also have to reprice their Ital­ian sov­er­eign debt as­sets, which may be less valu­able than when they bought them due to the in­creased risk.

This in­creased risk could in turn be passed on to house­holds and busi­nesses, through in­creased rates on loans and mort­gages. This could lead to an in­crease in non-per­form­ing loans, ac­cord­ing to the Bank.

In turn this could have a damp­en­ing ef­fect on the econ­omy at large as con­sumers have less money to spend, and busi­nesses find it more ex­pen­sive to bor­row and in­vest.

The Bank said it runs “stress tests” to model fi­nan­cial risk to the UK com­ing from over­seas, in­clud­ing from Italy.

“UK banks were re­silient to the 2018 stress test, which in­cor­po­rated a syn­chro­nised global down­turn in out­put growth as vul­ner­a­bil­i­ties across fi­nan­cial mar­kets and the global econ­omy crys­tallise”, it wrote in the re­port.

Ital­ian banks are far more heav­ily ex­posed to the risk, hav­ing around a tenth of their as­sets in sov­er­eign debt.

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