The recovery in economic activity in Europe and Italy during the summer was greater than expected, underlining the economy's capacity to recover and the effectiveness of the monetary, fiscal and supervisory support measures. However, the risks to financial stability owing to the macroeconomic situation have increased since the resurgence of the pandemic. This situation is affecting the outlook for growth, which will depend on the effectiveness and decisiveness of economic policy interventions.
Financial market conditions have improved greatly in Italy, as in the other European countries, and the tensions recorded in the spring have almost completely subsided. This is thanks above all to the effects of the pandemic emergency purchase programme (PEPP) and to the improved expectations generated by the European Council's agreement on Next Generation EU. This programme will make it possible to provide considerable support to economies by making full use of the EU's budget and lending capacity.
Italy's public debt remains sustainable, also bearing in mind the temporary nature of the expansionary fiscal measures; however, if it remains at high levels, it leaves the country exposed to future risks stemming from financial market tensions or from new macroeconomic shocks. A path for reducing debt could come from a combination of relaxed funding conditions, effective measures to support growth and a gradual fiscal adjustment consistent with the macroeconomic situation.
The economic policy measures adopted so far - including broader wage supplementation, debt moratoriums, tax payment deferrals, grants, and guarantee schemes for new loans - have helped to mitigate the economic consequences of the pandemic for firms and have amply met their liquidity needs. Nevertheless, the Italian economy will have to address the risks connected with the increase in the indebtedness of non-financial corporations and with the gradual lifting of the support measures. In the current climate of uncertainty, removing these measures too soon is to be avoided, as doing so could also hinder firms that are able to survive the crisis. Looking ahead, the effective implementation of measures designed to strengthen firms' capital and rebalance their financial structure can help to mitigate the risks.
Households' financial conditions were affected by the fall in disposable income. The repercussions, especially for financially vulnerable households, were contained by the low interest rates, the debt moratoriums and other support measures. The risks stemming from the sector remain limited and the share of debt of vulnerable households remains low.
The main risks for Italian banks stem from the possible deterioration in credit quality and a further decline in profitability. The rate of new nonperforming loans has remained very low up until now, benefiting from the government measures on credit and the guidance of the supervisory authorities on the use of the flexibility for loan classification. In the first half of this year, most banks increased their provisions on performing loans, in anticipation of a deterioration in credit quality, and profitability was severely affected as a result. During the same period, capital adequacy improved for both significant and less significant banks, thanks in part to the capitalization of the profits from the 2019 financial year that, in accordance with the recommendation of the supervisory authorities, were not distributed.
The average solvency ratio of Italian insurance companies fell below the levels observed at the end of 2019; nevertheless, it is still well above the minimum requirements. The benefits arising from the increase in portfolio securities prices and from the limitation of dividend distribution only partly offset the decrease in own funds generated by the drop in interest rates. The pandemic led to a reduction in profitability, especially in the life sector. The liquidity position of insurance companies remains stable, despite the overall decline in premium income.
Net subscriptions of Italian open-end investment funds have turned positive since April, following the emergence of tensions in March. The risks to financial stability stemming from alternative and property funds remain low. For both types of funds, the potential risks connected with investment in illiquid assets are mitigated by regulations requiring them to be set up as closed-end funds.
