Italian ‘doom loop’ threat to UK economy
Bank of England warns that problems at lenders in Italy could affect Britain’s financial stability
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.