Category Archives: Euro area non-performing loans

20/2/17: The Effect of GFC on Italian Non-Performing Loans Overhang

In yesterday’s post I covered some interesting current numbers relating to NPLs in the European banking sector. And sitting, subsequently, in the tin can of an airplane on my way back to California, I remembered about this pretty decent paper from Banca d’Italia, published in September 2016.

Titled “The evolution of bad debt in Italy during the global financial crisis and the sovereign debt crisis: a counterfactual analysis” and authored by Alessandro Notarpietro and Lisa Rodano (Banca d’Italia Occasional Paper Number 350 – September 2016), the paper looked at the evolution (dynamics) of Italian banks’ NPLs since the start of the Global Financial Crisis and the twin recessions that hit Italy since 2008. Actual data is compared against “the counterfactual simulations". "A ‘no-crises scenario’ is built for the period 2008-2015. The counterfactual dynamics” generate a comparative new bad debt rate, which “depends on macroeconomic conditions and borrowing costs.”

Per authors, “the analysis suggests that, in the absence of the two recessions – and of the economic policy decisions that were taken to combat their effects – non-financial corporations’ bad debts at the end of 2015 would have reached €52 billion, instead of €143 billion."

Chart above plots the evolution of two time series of debt: actual and ex-crisis counterfactual, for non-financial corporates, showing the crisis-related debt overhang of around EUR 90 billion. More precisely: “In the absence of the two crises – and of the economic policy decisions that were taken to contrast their effects – the stock of non-financial corporations’ bad debts at the end of 2015 would have reached €52 billion, instead of €143billion. In the counterfactual scenario, the level at the end of 2015 is only 1.7 times larger than the one observed at the end of 2007; in actual data, the observed level was almost 5 times as large. As a share of total outstanding loans to non-financial corporations, bad debts rose at about 17.9 per cent at the end of 2015; had the two crises never occurred, it would have been around 5 per cent, roughly in line with the pre-crisis level.”

While the numbers may appear to be relatively small, given the size of the Italian real economic debt pile, provisioning on this bad debt overhang would amount to a serious dosh. Per the authors’ and previous estimates, roughly 13 percentage points was lost in Italian GDP (once public debt is accounted for). In other words,  through 2015, Italian economy has lost some 13.5 percent of GDP in potential output due to debt overhang. Of this, near 7 percentage points were lost due to sovereign debt-related losses and 6.5 percentage points due to corporate bad debt overhang.

17/2/17: European Non-Performing Banks’ Loans 2016

Latest Fitch data shows some significant progress achieved by Ireland in dealing with non-performing loans on banks' balancesheets:

According to Fitch, Irish banking system ranked 6th worst in terms of NPLs in the EU at the end of 2016. This is a significant improvement on second and third places for Ireland during the height of the Greek and Cypriot crisis. However, the above data requires some serious caveats:

  1. Ireland has been the earlier starter in the game of repairing banks' balancesheets than any other country in the Fitch's Top10 Worst systems table above;
  2. Ireland's performance crucially depends on the assumed quality of mortgages debt restructurings undertaken by the banks over recent years - an assumption that is hardly un-contestable, given that the vast majority of mortgages arrears resolutions involve extend and pretend types of measures, such as extending mortgages maturity, rolling up arrears into a new (for now cheaper) debt and so on; and
  3. Ireland is compared here to a number of countries where the banks bailouts have either been much shallower or completely absent.
Still, for all the caveats, it is good to see that after 9 years of a crisis, Irish banking system is no longer in top-5 basket cases league table in Europe. At this speed, by 2026, me might be even outside the top-10 table... 

7/5/15: Europe’s Non-Performing Loans: Still Rising & Getting More Toxic

In the world of scary stats, there's no place like Europe.

Even the perennial optimists at the IMF - that place where any debt is sustainable as long as there are structural reforms underway - agrees. This is why the IMF published this handy chapter as a part of its Global Financial Stability Report for Q1 2015 (

In this report it said that [italics are mine]: "Asset quality continued to deteriorate in the euro area as a whole in 2014, although at a slowing pace, with total nonperforming loans now standing at more than €900 billion. Furthermore, the stock of nonperforming loans in the euro area is unevenly distributed, with about two-thirds located in six euro area countries. [The stock of nonperforming loans in Cyprus, Greece, Ireland, Italy, Portugal, and Spain in total amounts to more than €600 billion]. In Cyprus, Greece, Ireland, Italy, Portugal, and Slovenia, a majority, if not all, of the banks involved in the ECB’s Asset Quality Review were found to have nonperforming assets of 10 percent or more of total exposure."

Roll in two super scary charts:

So far so bad… But it gets worse. "These bad assets are large relative to the size of the economy, even net of provisions. Euro area banks have lagged the United States and Japan in the early 2000s in their write-offs of these bad assets, suggesting less active bad debt management and more limited improvement in corporate indebtedness."

And another spooky illustration in order here:

Now, let's sum this up: after 6 years of 'reforms', deleveraging, special bad loans vehicles set ups, extraordinary legislative and regulatory measures aimed at dealing with loans arrears, waves of corporate and household bankruptcies, a minestrone worth of alphabet soups of various 'Unions' etc etc etc…

  • Bad debts pile in Euro area is rising;
  • Bad debts pile in Euro area is not matching dynamics in other countries, specifically the economic wasteland of Japan; and 
  • The best performing country in the group - Ireland - has the second worst performing banking balance sheet in the group (even after Nama and IBRC are netted out).

Clearly, successful resolution of the crisis is at hand.