Italian government’s plan to run fiscal deficit of 2.4% of GDP next year is causing some worries on financial markets (with pressure on the spread between of Italian long term public bond vs German ones commonly used as benchmark) because it threatens long terms sustainability of Public Debt/ GDP ratio (currently above 130%) and may trigger a downgrade by Rating Agencies.
May this affect Italian NPL Market?
(Spread BTP- Bund during last year)
The most immediate effect of this policies is to increase the risk premium required to invest in Italy with a consequent downward pressure on public bonds and stock prices. Italian banks hold large amount of public debt, 370Bn€ or 10% of their assets according the Economist, and the mark to market of these securities is going to cause large capital losses.
In near future we can expect a worsening of macroeconomic imbalances currently affecting Italy with the increasing risk that, should the rating fall below investment grade (actual level is 2 notches above junk bonds with negative outlook), the country may find not only more expensive, but also more difficult to rise funds on capital markets.
This will probably affect Italian NPL market only to a limited extent because:
- in Italian market is largely prevalent the “Private Equity approach” where not only asset portfolios but also servicing platform have been acquired by foreign players – this kind of investments (doBank, Intrum-Intesa) once started would hardly be influenced by worsened macroeconomic conditions
- risk premium increase does not matter for Italian players (IFIS, MB Credit Solutions) and has reduced impact of local subsidiary of European players (Arrow, Kruk, Hoist, Axactor) furthermore there is an increasing number of NPL buyers with a banking license (Illimity, Guber) that will raise funds to invest locally
- since NPL are illiquid assets (like real estates) they tend to react to Macroeconomic shocks with a slower pace
A negative contribution to the volume of NPL on sale may come from the reduction of capital base that banks can use to finance increase in provisions and loss coming from NPL sales. Nevertheless GACs facility to incentive securitization recently prolonged may help to reduce this effect and there are rumors of an extension to Unlikely to Pay claims.
Finally, special and master servicing market is expected to growth due to increasing pressures of new regulation (e.g. ECB Guidelines on calendar provisioning) and Macroreconomic imbalances that currently threaten banks’ stability may provide an interesting opportunity for credit management firms.
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GLG – Gerson Lehrman Group – Council Member