|On March 9, Italy placed about 60 million of its residents under lockdown as the number of confirmed cases of COVID-19 increased throughout the country. / Photo by: Aleksandr Ozerov via 123rf|
Italy, the world’s eighth-largest economy, is now facing a $2.4 trillion virus problem because of its stressed financial system, reports Bloomberg.
On March 9, Italy placed about 60 million of its residents under lockdown as the number of confirmed cases of COVID-19 increased throughout the country. In less than a month, the three cases grew to more than 24,000, making it the worst-hit country after China. Prime Minister Giuseppe Conte said that they have to give up something for the good of Italy. The lockdown, however, is expected to create major economic repercussions.
Reducing the impact of nationwide lockdown to GDP, individuals, and businesses
Italy is reportedly planning to spend $30 billion or €25 billion to blunt the impact of the nationwide lockdown on its gross domestic product, to individuals, and businesses in the country. This also means that Europe’s stock of public borrowing will grow bigger.
More than €446 billion of private and sovereign Italian debt are being held by European banks. As the COVID-19 cases increased in other nations, Italy’s debt will be a “double burden” to the financial systems that are also dealing with economic pressure.
Main holders of Italian public debt
Think tank on European policies CEPS published data on who holds Italian government debt: households (€100 billion), Italian banks (€400 billion), Italian insurance companies ($310 billion), Investment funds (€300 billion), and foreign banks, insurance, etc. (€400 billion). This means that Italian banks are the largest source of finance for the Italian government.
Bloomberg European Banking Authority data analysis also showed the credit exposure breakdown among non-Italian European banks as of June 2019. The list includes French international banking group BNP Paribas (€150.0B), financial services company Crédit Agricole (€99.0B), Deutsche Bank -Germany (€29.8B), DEXIA – Belgium (€22.0B), Société Générale – France (€21.7B), Barclays – UK (€17.2B), BBVA- Spain (€14.2B), Commerz-bank -Germany (€13.5B), BPCE – France (€12.0B), BCC – Spain (€7.7B), Sabadell – Spain (€6.9B), RCI- France (€6.7B), SFIL – France (€6.2B), Volkswagen Bank – Germany (4.8B), Aareal Bank – Germany (€4.1B), Unicaja Banco (€3.8B), DZ – Germany (€3.4B).
Credit exposure is the total amount of credit that a lender avails to a borrower. It likewise indicates the extent to which the lender is exposed to the risk of loss in case the borrower defaults on the loan, as defined by the financial platform Investopedia.
The most exposed among the provided list of non-Italian lenders are the French banks in the event a sell-off in Italy will begin to spread through the financial system of Europe. Credit Agricole SA and BNP Paribas, two of the largest banks in Italy, have retail units in the country.
To keep its debt in check, the country has to sell over €400B a year, forcing domestic banks to also buy more debt. This situation is called the doom loop. In economics, this is a negative spiral as sovereigns are exposed to bank risk and vice versa. Weak banks and a weak economy are feeding into each other. It may take years to undo the impact that the COVID-19 outbreak caused. If the lockdown will be prolonged in Italy, it may increase the bad loans that the country has worked for several years to reduce.
The virus officially began in Italy on February 20, when a 38-year-old man tested positive with COVID-19 in the town of Codogno. Some health officials believe that the virus may have arrived in the country even before they discovered the first case. Since the virus spread unnoticed by the time people realized it, there were already a lot of transmissions. The government took measures when the number of deaths caused by the virus already reached nearly 500.
Europe economist Jack Allen-Reynolds also shared via American media company CNN that even if the Italian government has already lifted the restrictions, the economy will still contract in the first half of 2020. The GDP is likewise expected to decline by about 2% for the whole year. An economic contraction means a decline in national output as measured by the GDP.
|The virus officially began in Italy on February 20, when a 38-year-old man tested positive with COVID-19 in the town of Codogno. / Photo by: Lightspring via Shutterstock|
Sectors most affected by Italy’s lockdown
The sectors that are most affected by the lockdown are transport, retail, hotels and restaurants, and art and entertainment. All of these sectors account for nearly 23% of the country’s GDP. Major companies in Italy are also complying with the limits. Automobile company Fiat Chrysler, for instance, announced that it will be temporarily closing its four plants in the country and will be reducing its production rates to lessen the risk of the COVID-19 to spread among its employees. They will also be increasing the space between their employees in their workstations to limit contact.
Volkswagen Group-owned Lamborghini said that it is still “too early” to give a detailed forecast on the impact of the lockdown on their business. Social distancing has also been implemented in Italian supermarket chain Esselunga, requiring restaurant patrons and shoppers to remain at least three feet apart. The containment measures implemented by Italy will also ripple in other countries in Europe. Manufacturing will be potentially disrupted, CNN added. Italian trade association Confindustria’s chief economist Stefano Manzocchi also said, “this is going to be a European problem.” Aside from being the eighth-largest economy in the world, Italy is also the third-largest economy in the eurozone.
The top world economies are the United States ($21.44 trillion nominal GDP), China ($14.14 trillion), Japan ($5.15 trillion), and Germany ($3.86 trillion).
As of March 16, there are 2,335 recovered patients, 92% or 18,931 are in mild condition while 8% or 1,672 are in serious or critical condition. This data is provided by the real-time world statistics provider Worldometer.
According to London-based economics company Capital Economics, the food services and accommodation sector could suffer a 75% decline in their output because of the lockdown. This is because an estimated 1.7 million people are employed in the sector. Association of hotels Federalberghi pointed out that many of the workers in the food services and accommodation sectors are working on contract for less than a year and are not qualified for the redundancy benefits.
The pandemic risks in Italy are now real but Italian society is also known for its resourcefulness and resilience. They need solidarity and support from other countries in Europe too as Italy’s struggle with the virus is also a threat to the eurozone.