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.