The world economy continues to expand but at a slower pace; risks remain - The world economy continues to expand, although more slowly and at different paces in the various areas. Output growth in 2011 is forecast to be robust in the emerging and developing countries, moderate in the advanced economies. In Italy, GDP is expected to expand at a slower pace than the average for the euro area.
In the advanced economies the strength of the recovery is subject to risks. World demand could be affected by the phasing out of the extraordinary support measures adopted during the crisis; households’ and firms’ spending decisions could be held back by the need to reduce debt and by the slow recovery of employment. Credit supply-side tensions may resurface.
The markets are affected by the deterioration in the public finances ... In the euro area the markets are affected by the deterioration in the public finances; in the countries with severe budget problems risk premiums are extremely high. The risk of contagion has been limited by the exceptional measures adopted by the European authorities.
Looking ahead, the persistent public finance imbalances in the advanced countries threaten to act as a brake on investment, feed fears of inflation, and further raise the risk premiums on sovereign debt. This could lead to significant rises in medium- and long-term interest rates, with adverse effects on the recovery and capital markets.
... and uncertainty about the robustness of the recovery - Favourable expectations regarding corporate profits and lower interest rates have sustained the global recovery in the stock and bond markets. This improvement needs to be underpinned by a lasting strengthening of the economic fundamentals, as the abundant supply of inexpensive liquidity from the central banks will eventually come to an end.
The low level of interest rates in the advanced countries could prompt investors to take large risks in order to obtain high returns. Flows of capital to the emerging countries are increasing, pushing up the prices of financial assets there.
The profitability of the leading international banks could diminish - Part of the recent improvement in the profitability of the leading international banks could be temporary. The public support measures introduced in several countries have been removed or are expiring; trading profits, linked to the favourable financial market conditions of recent months, could diminish; net interest income, which is limited by the low level of interest rates, could be affected by the flattening of the yield curve following the adoption of new monetary stimulus measures in several countries. Over the next two years, the banks will need to refinance a very large volume of bonds, at a time when sovereign borrowers and firms are greatly increasing their recourse to the market.
Overall, in the euro area, banks’ demand for central bank refinancing is declining; the excess liquidity with respect to reserve requirements has decreased. Some banks experience difficulty in accessing the markets, which they overcome by having recourse to the Eurosystem. Looking ahead, the removal of the extraordinary liquidity measures require changes in banks’ funding.
In Italy the situation of households and firms is still affected by the crisis - In Italy, firms’ financial situation and profitability are improving, although the effects of the crisis have not been completely overcome. The tensions that surfaced during the recession have spread within the productive system owing to 8 the lengthening of firms’ payment times. Corporate debt is not out of line with that in other countries but the high proportion of short-term debt and the prevalence of variable-rate loans among long-term liabilities will heighten the risks associated with a rise in market rates.
The financial situation of Italian households remains generally sound, thanks to their low level of debt and large share of low-risk assets. However, the rapid growth of variable-rate mortgages increases the potential repercussions of a rise in financial costs. Furthermore, although borrowing for home purchase continues to be the prerogative of higher-income and more solvent households, before the crisis it had also grown considerably among the less well-off, for whom debt service payments represent a larger share of income.
The market’s evaluation of the soundness of Italian banks is affected by sovereign debt risk within the euro area -As in other euro-area countries, in Italy investors’ judgment on the soundness of the largest banks reflects the strains in the market for the sovereign bonds of some countries. However, the market indicators and measures of systemic risk show that the repercussions on Italian banks have generally been limited.
Bank lending to firms is recovering - Lending to firms, especially by the largest banks, has resumed growth. This reflects the upturn in demand as well as the end of tensions on the supply side. Lending to households is also gaining pace. Our analyses indicate that these trends will continue next year.
Credit quality shows signs of improvement - The quality of credit still shows the effects of the 2009 recession, but the latest data indicate that the flow of new bad debts may have stabilized. Econometric estimates consistent with the expected evolution of the main macroeconomic variables suggest that the default rates of both households and firms will decline in 2011. These forecasts are subject to uncertainty, mainly in connection with macroeconomic developments.
The international exposure is stable - Overall, the exposure of Italian intermediaries to foreign counterparties is stable. There has been an increase vis-à-vis the countries of Central and Eastern Europe, where economic and financial conditions are improving but where credit risks are high. The exposure to foreign banks is limited. The tiny portion of total bank assets represented by loans to borrowers in the euro-area countries with problematic public finances mitigates the balance-sheet impact of the sovereign debt strains.
Banks have good liquidity conditions - Italian banks display a good short-term liquidity position. The high proportion of retail funding confers stability, and the funding gap remains small. Recourse to Eurosystem refinancing is very modest, including by comparison with the other euro-area countries. Over the next two years, however, Italian banks, like those elsewhere, will have to roll over large volumes of maturing bonds.
Market risk has declined and counterparty risk is stable - Market risks are diminishing. A rise in interest rates would have limited, and in some cases beneficial, effects. Counterparty risk has remained low, given that positive-value and negative-value positions in derivatives are balanced at the level of individual intermediaries.
The profit outlook remains cloudy - The banks’ performance is still suffering the effects of the recession. In the coming months their profitability could benefit from a pick-up in lending and a possible gradual improvement in credit quality, but the outlook is influenced by the low level of interest rates, uncertainty over the robustness of economic growth and the possible resurgence of sovereign debt strains in the euro area. Lasting enhancement of profitability will require action on costs, which are still higher than the European average in proportion to income.
Capital needs further Strengthening - Italian banks have strengthened their capital bases by various means: capital increases, retained earnings, issues of securities purchased by the Ministry for the Economy and Finance and disposals of non-strategic assets. In a cyclical expansion characterized by significant market and credit risks, it is essential to consolidate the expansion of own funds.
In the longer run, the major Italian banks, like their counterparts abroad, will have to make a considerable effort to comply with the new, more stringent capital adequacy requirements developed by the Basel Committee. The long period of transition will attenuate the effects of the new rules on banks and the economy.
Insurance companies face costs in connection with low interest rates - Overall, Italian insurers have low levels of exposure to potential instability on the financial markets. However, they must cope with the costs entailed by the low level of interest rates.
Banks’ behaviour in interbank markets has changed - Italian banks have become more sensitive to credit and liquidity risk. The share of collateralized trades has risen at the expense of uncollateralized trades. The share of transactions carried out in the OTC market has increased. That of transactions with foreign counterparties has diminished. These changes have enabled banks to contain risks in a phase of global financial instability, but massive resort to OTC trading may undermine market transparency; the tendency to trade with domestic intermediaries could restrict the number of potential counterparties.
MTS has guaranteed the liquidity of trading - In 2010 the electronic secondary market (MTS ) has guaranteed continuous trading in Italian government securities even at the moments of most acute strain. Demand for government bonds has remained strong, enabling the Treasury to continue to lengthen the average duration of the debt.
The settlement infrastructure has ensured reliable and continuous functioning - Payment and settlement infrastructures contributed decisively to the orderly conduct of trading in the Italian markets. Both the euro-area TARGET 2 gross settlement system and Italian structures have ensured perfect business continuity during 2010.
