What Italian Banks Can Learn From Spain's Bad Loan Devastation

Tyler Durden's picture

We have commented numerous times on the inexorable rise in Spanish non-performing loans (NPLs). Since the Spanish economy started to weaken at the end of 2006, NPLs have been rising sharply; but the subsequent collapse of the Spanish property market exacerbated the matter further, causing a spike in NPLs in 2007 and 2008. Since then, the Euro area crisis and subsequent sharp rise in unemployment have led NPLs at Spanish banks to make new record highs. However, they are not alone.

Italian banks did not suffer a property market collapse and so the rise in NPLs started later than in Spain and was not as severe. However, as JPMorgan notes, the sharp rise in unemployment we have seen since mid 2011 has led to an acceleration in NPLs at Italian banks (and this is a problem is unsustainable). What should be most worrying for incoming PM Letta, is that from the respective troughs for each country (the trough for Spain was a lot earlier than for Italy, about two years in actual fact), Italy is looking eerily similar.

The rise in NPLs at Spanish banks over the past two years has had a lot to do with the recession and rise in unemployment. To the extent that Italian unemployment has only started to rise sharply a year and a half ago, the future path for NPLs at Italian banks looks set to follow that of Spain. So why aren't bond spreads blowing wider? Answer below...

Non-Performing Loans as a share of total loans at Spanish and Italian banks


Cumulative rise in NPLs as a share of total loans starting from the trough for each country. For Spain this is Nov 2006 and for Italy this is Dec 2008.


But, of course, none of this matters for now. As politicians look on at their relative sovereign spreads and reflect on a job well-done.


The reason, however is simple...

Across countries France, Italy and Spain saw the highest deposit inflows in March at €16bn, €15bn and €11bn respectively. In principle, these deposit inflows boosts the surplus funds that peripheral banks have to repay existing LTRO borrowing, but it appears that these deposit inflows are channeled into domestic government bond markets instead. Both Spanish and Italian banks bought large amounts of domestic government bonds in March, €16bn and €11bn. This brings their Q1 purchases to around €30bn each. French banks follow with €16bn of domestic government bond purchases in Q1.

So, what happens when there is no more money for the local banks to reach-around and buy domestic bonds with? Or the domestic pension funds are 100% allocated to sovereign debt? There is a limit (both in the purchasing power of the marginal buyer, and the extent to which the marginal seller re-appears based on any real valuation measures)...

Charts: JPMorgan

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W T F II's picture

C'mon...everyone with a pulse knows Spain is buying it's bonds from itself through the rapidly depleting "Pension Trust"...This way, everyone gets the same haircut when the inevitable arrives

howenlink's picture

If the Spanish are like the Cypriots, they won't learn much from it.

Kirk2NCC1701's picture

They're not buying PM bullion (like they should), but are buying BTC, I believe. Should be interesting, if not educational.

LetThemEatRand's picture

Italian banks should learn from American banks -- get a few hundred billion in give aways and fund your ongoing operations with tax payer backed interest free money from the Fed, sell your shitty mortgages to pension funds and individual investors seeking yield based on false data, continue to reflect the market high price for all mortgages remaining in your inventory on your balance sheets and don't dare sell them on the open market until Ben figures out how to reblow the bubble, and give both parties a few million each year out of your billions of profit to keep them quiet.  Oh, and make sure the attorney general's name is Eric Holder.

ArgentoFisico's picture

and now someone is more than willing to kill politicians here in italy:


css1971's picture

Well at least the sentiment was in the right place. The problem with this is your ordinary person has no idea what is causing his problems and liable to go off in a random direction.

Kirk2NCC1701's picture

The Mob could've done a much better job -- if they weren't already retained by their cousins, the Banksters.

olto's picture

Hey Kirk,

It has appeared for some time now, to me, that the 'Mob' took over the banks a couple of decades ago,

but maybe you are correct.

But please tell me how you can tell them apart?

Bam_Man's picture

The Spanish and Italian depositors will eventually be "bailed-in". Those NPL charts are the proverbial "handwriting on the wall".

Anyone with more than token amounts in any of those banks is a complete fool.

"Cypress Part Dos" and "Cypress Part Tre" coming to a Southern European theatre near you.

css1971's picture

Sounds like Spanish people should think about getting their money out of those banks...

Kirk2NCC1701's picture

The Italians did not have the same degree of offshore (British) money inflating real estate prices as in Spain.

The housing bubble in the UK (during Tony-the-whore Blair's co-invasion of Iraq) spun off into a Spanish and Portuguese housing bubble, as the Brits decided that they'd rather own than rent their favorite resort homes down South.

And, just as in the good ol' US of A, once the housing frenzy got into full gear, the banks were all too eager to aid & abet that Ponzi -- thanks to these wonderful new American financial 'products' that were 'mitigating' their risks, and help juice bank profits and executive bonuses. Booyah! / sarc

disabledvet's picture

and the answer is just as simple: "turn to Wall Street." the problem so far is that Europe still hasn't gone through it's recession yet...in my view. "first the interest rates collapse the entire system by exploding higher" (as what should have happened in the USA but was prevented because we were Running with the Devil once our own Troika in Paulson, Bernanke and Geithner took charge) then the AFTER the economies have been utterly obliterated "the program begins" but it's more like shock therapy "for all the wrong thinking people." (is it like or is it how it actually is?) thus "interest rates plunge as all the paper is swallowed up Ben Bernanke style." the problem of course is "some paper is more valuable than others" namely "my Bank's paper not yours" thus...again in my view...leading to a mad scramble to "take it to the little guy" (Greece, Portugal, Ireland) then "when that doesn't work" just start stealing the money (Cyprus) so that "you really get your point across to (France, Spain Italy) that you (Germany, the Netherlands, Finlandia) really MEAN it. if this doesn't make any sense that's good...because it really doesn't. i think the title of the book was "Boomerang"...http://www.nytimes.com/2011/09/27/books/boomerang-by-michael-lewis-revie... but rather than the "boomerang" being the problem of "excesses" it is the response the excesses we need to discuss here. let's just say "if you're looking for the adults in the room" as Mr. Lewis is "you won't find them here." he speaks of Americans "just stealing" but obviously we have nothing on Europe right now. in my opinion "this is all out war" but instead of moving Army divisions across the Continent your moving data sets and powerpoint presentations. the point is still the same "your pain is my gain" and LTRO and all the rest have done nothing to hide that basic premise...the only premise that i see. at the center of it all...again in my view...is gold. not gold for you and me mind you but "state gold" with various forms of "heisting" going on. Wall Street will not come in (to lend) until the dust settles...and that could be a very long time. obviously the bulk of the capital has been going to Germany from both London and New York...and while i'm clearly speculating here in my view that is a MASSIVE amount of capital. the idea of a free trade zone between Europe and the USA is an interesting one...but again "US based banks win again." there still can be military implications here...i'm surprised there hasn't been already actually...hmmm. "Spain, Spain, Spain." http://www.youtube.com/watch?v=Bl4dEAtxo0M

q99x2's picture

So, what happens when there is no more money for the local banks to reach-around and buy domestic bonds with?

Give the Bernank a call. He'll print them up some in a jiffy.

THE DORK OF CORK's picture

Not a lot.


These "assets" are a fiction.

They always were a fiction.


To save the curency these deposits should have become national equity tokens and the debt considered null and void.

However efforts to save this double entry system has caused the collapse of the remaining rational physical economy.

jonjon831983's picture

Hmm is there a chart with the NPL + unemployment?  See what kinda lag there is.

pashley1411's picture

Sort of a Neutron bomb. 

In the original version, killed people and left the superstructure intact.  

In the latest, "Krugman Devilstar", destroys wealth while leave the superstructure intact.   Ingenious.