Italy on the brink: Coronavirus exposes HUGE weaknesses in shaky banking sector

Rome has effectively placed its entire economy into a temporary coma to curb the spread of COVID-19 after becoming the world’s worst-affected country. As of this morning, Italy has suffered at least 7,503 deaths related to the virus and recorded 74,386 confirmed cases of infection. Prime Minister Giuseppe Conte has imposed a full lockdown, including the closure of all non-essential factories, in a desperate bid to bring the daily death toll down.

But this has placed incredible pressure on Italy’s economy, with manufacturing output down and the national debt pile being added to on a daily basis.

Before the outbreak of the global pandemic, Italy’s debt-to-gross domestic product ratio was about 135 percent, the second-highest in Europe behind Greece.

This has prompted fears in the Italian banking sector, with many domestic lenders holding a huge chunk of the country’s sovereign bonds.

A so-called “doom loop” has re-emerged with the majority of banks’ fortunes linked to Italy’s fluctuating economy.

Lorenzo Codogno, a former chief economist at the Italian Treasury Department, said: “The doom loop is still pretty much there.

“If there is a widening of spreads, then immediately the banks are going to fall into difficulty.”

The expert told the Financial Times that without the intervention of the European Central Bank, which has kept interest rates in negative territory since 2014, “Italy would already be in default”.

He added: “The situation is desperate.”

Credit analyst Filippo Alloatti, of Federated Hermes, believes Italian banks’ exposure to government debt is “still very much in place”.

Banking chiefs have reduced their holdings of government debt to £348million (€380million) compares to the peak of £378billion (€413billion) at the start of 2015.

Rome has moved to ensure a new debt crisis doesn’t engulf the country’s economy by rolling out new coronavirus finance measures.

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Hundreds of businesses are struggling to meet loan payments due to the nationwide shutdown.

To stop defaults the government has approved a six-month debt delay, but banks also face new requests for emergency loans.

Italian banker Giovanna Bossi said: “The economy has stopped but debt doesn’t.

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“Businesses are scared about short-term liquidity. Just think of shut-down restaurants, cinemas, shops which, come the end of the month must pay rent, supplies, salaries.”

But Italy is preparing to take on much of the burden of these new loans, by offering to guarantee 90 percent of lending related to the shutdown.

It has also pledged to cover a third of the losses banks could face once the debt holiday ends.

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