The unbearable lightness of borrowing

Initial Considerations on the Governor’s Final Considerations

[The Bank of Italy identifies two weaknesses for Italy: public debt and non-performing loans. It is a lucid analysis, but insetad of concrete  solutions it just has good principles. Still, from alternative finance, concrete proposals come that the traditional finance world has the duty to consider]

The lucid analysis of the Governor of the Bank of Italy, Ignazio Visco, puts on display, on the stage of the Italian crisis, the two main antagonists to economic growth: “…public debt and the so-called non-performing loans. These are two weaknesses that reduce the margins of operation for the State and financial intermediaries…” [https://www.bancaditalia.it/pubblicazioni/relazione-annuale/2016/index.html].

On the one hand, there is the high public debt that reduces space for spending, on the other are the non-performing loans (Npl), which absorb assets, destroy value and, ultimately, weaken ability of banks to supply loans to the real economy. It is right, therefore, that the Governor points the spotlight, and the lights of a bitter limelight, on the two “negative actors” — ​​of the narrative of this, by now, ten-year crisis.

It is difficult for someone in the audience to be surprised by the analysis; as what happens with the wisest spectators of a theatrical opera classifiable among the great classics, also among the authorities and experts present at the Bank of Italy for the annual Report meeting, the storyline is well-known. In such cases, appeal  and personal growth takes place and develops, more than in the plot — which everyone knows — in the way it is presented, in the sentiment, in the nuances that the great directors know to release in their actors.

In the work entitled “Final Considerations – May 31, 2017,” the antagonists are real, and known, and appear as true giants; and the Governor does not hesitate to remember this. The numbers, however, help him to ensure that the audience does not lose hope of a happy ending. Thus, rightly, from the Bank of Italy, comes a strong sign that with a primary surplus of 4% of GDP — as programmed by the Government — it would take ten years to bring the debt / GDP ratio below 100%; but Italy can do more: it has already done it between 1995 and 2000, when it recorded a primary surplus of 5% of GDP. So, it can be done again.

Likewise, it is rightly indicated that, even though the level of criticality of non-performing loans in the Italian banking sector is undeniable, the net losses already recorded in the balance sheet amounted to 173 billion in 2016, which is well below the 350 billion recalled in the daily media debate. No less important is the fact that, of the 173 billion, only 81 are past due, covered, moreover, by some 90 billion real guarantees and 40 billion personal guarantees.

Putting the antagonists into perspective, these do not look like unbeatable giants: policy makers, managers, and operators, no longer have to suffer from Gulliver’s syndrome, but can, with greater serenity, face the giants with the right weapons and the right measures.

Now, here’s the point; in every success story – sometimes not even with a happy ending – for every antagonist, there is a corresponding protagonist. From the screenplay of the Italian crisis, therefore, one would expect the appearance hero on stage, capable of compassion, but above all, having new weapons and strategies to neutralize the anti-heroes.

In the financial plot outline, this all translates, perhaps less persuasively but still functionally, to the ability of men and institutions to follow the solution to the analysis. And the solution, alas, cannot be that of the “short blanket” that in many roles, with different styles and elegance, has been evoked for years: increasing growth by resorting to public spending, in fact, has its limits in the fiscal compact and in the reduced margins left to fiscal stimulus; quickly clearing the balance sheets of banks involves risks of excessive value destruction. In both cases, there are issues of stability – sovereign and of the banking system — and wealth distribution.

From the ethics of finance, we need to start to find the new protagonists of the economic recovery that do not only play the role of extras. From alternative finance, in fact, short-circuit solutions are emerging that seem to be missing in traditional finance. Social impact finance, for example – never mentioned in debates or programmatic documents — is a useful and concrete option to stimulate growth without burdening public spending or resorting to the usual “nonlinear cuts” to public expenditure. Through a public-private partnership, set up on “pay for success” mechanisms, you can fund infrastructure and welfare services by paying back private investors thanks to the savings on public spending generated by the investment and the resulting social impact. Several countries around the world, including the United States and the United Kingdom, have undertaken active impact investing policies  [https://thegiin.org/knowledge/publication/annualsurvey2017#ImpactMeasurementandManagement].

Italy, even though it was among the most recognizable members of the Task Force on Investments and Social Impact set up at G7 level, did not know how to take concrete actions; still, the policy makers’ recommendations contained in the Task Force Report, and those in the Italian Advisory Board, are prompts for a policy to stimulate sustainable growth [http://socialimpactinvestment.org/].

On the issue of non-performing loans (NPL), it is right for the Governor to launch a warning on the risk of transferring resources from the banks to the few investors specialized in the purchase and management of non-performing loans. It should also be remembered that the theme of wealth distribution is not only relevant to the assignment of NPLs to external entities, but it is present, perhaps in less striking shades and still in the background, even in internal management solutions. The emerging interest of banks in the set up of specialized internal units, with staff often remunerated with incentives on the outcome of the recovery of non-performing loans is likely to generate, in the average term, a “counter-business” that can be configured as a true primary business area — not potential and residual — capable to stimulate banking policies based on moral hazards. A kind of “shadow business ” very far away from that banking activity referred to in article 10 of the Italian Banking Act — “collection of savings and granting of loans” – which would institutionalize a voluntary disintermediation process with distorting effects on the systemic distribution of value.

The issue of NPLs is not just a matter of their “ex post” management but, climbing back to the top, is a theme of loan policies. Concrete actions are needed that encourage banks to review loan distribution patterns and strategies. From the European Banking Authority figures for 2016, it emerged that Italian banks recorded the highest rate of non-performing loans (47.8% of the total) in the construction sector, compared with a European average of 26.7%; This figure is not only indicative of the state of anomalies of the loans, but also of the underlying inability to diversify the loan portfolio by sectors. It is, therefore, necessary to stimulate expertise, within the banks, to facilitate a process of freeing loan policies from consolidated practices and mature sectors: an active management of non-performing loans also goes from here.

Regulators, therefore, have the task of implementing measures to stimulate more inclusive and less backwards loan policies; for this reason, policy makers must strive to promote: (i) new prudential supervisory rules that do not, in the first place, penalize intangible assets and innovative sectors; (ii) new crisis resolution rules, which also consider the effects of financial and social inclusion, together with value distribution; (iii) new generations of managers who are able to interpret finance in a holistic and inclusive way; (iv) new and diversified representations in the governance of European authorities, which ensure not only strictly financial interests, but are also oriented to the dynamics of sustainability and, specifically, the objectives of the European social agenda which, to date, is fully correlated with the Banking Union.

For this to happen, we need cross-cultural actors who do not only deal with finance; men able to identify the guilty and scale down the antagonists, but also call the protagonists on stage that can dictate the change of pace of this dull financial phase. There is a need for a team of innovative screenwriters, directors able to “think about difference” and actors who can communicate it: the only weapon to switch from prognosis to posology. Italy has a tradition of great authors; the task of a cultural revolution of finance is up to them; it is up to their pens and to their minds to form proposals to free the country from this unsustainable lightness of borrowing which is, of course, the result of recent disasters, but also, and above all, the legacy of ancient Italian comedies that of Goldonian art struggle also to degrade the memory of it.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Good or Bad?

.GOOD NEW

La lucida analisi del Governatore Visco pone in evidenza rischi e criticità collocandoli nella giusta dimensione che gli spetta, reclamando un ruolo più attivo ed innovativo delle istituzioni e dei policy makers.

Dalla finanza ad impatto sociale giungono proposte concrete per stimolare la crescita senza compromettere gli obiettivi del fiscal compact. La gestione dei NPL non può passare solo da misure di gestione “ex post”, che favoriscono redistribuzioni di valore controverse, ma necessita di nuove politiche del credito.La lucida analisi del Governatore Visco pone in evidenza rischi e criticità collocandoli nella giusta dimensione che gli spetta, reclamando un ruolo più attivo ed innovativo delle istituzioni e dei policy makers.

Dalla finanza ad impatto sociale giungono proposte concrete per stimolare la crescita senza compromettere gli obiettivi del fiscal compact. La gestione dei NPL non può passare solo da misure di gestione “ex post”, che favoriscono redistribuzioni di valore controverse, ma necessita di nuove politiche del credito.

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 BAD NEW

Dalla fase della prognosi a quella della posologia il passo è breve, ma occorrono attori protagonisti in grado di cambiare passo per uscire dal cortocircuito della “coperta corta”. Per coglierle le sfide, ed affrontarle con concretezza, occorrono uomini con visioni differenti, ispiratori di una finanza inclusiva ed empatica. Ad oggi, non pervenuti. Colpa dei registi, dei casting o delle produzioni?

 Dalla fase della prognosi a quella della posologia il passo è breve, ma occorrono attori protagonisti in grado di cambiare passo per uscire dal cortocircuito della “coperta corta”. Per coglierle le sfide, ed affrontarle con concretezza, occorrono uomini con visioni differenti, ispiratori di una finanza inclusiva ed empatica. Ad oggi, non pervenuti. Colpa dei registi, dei casting o delle produzioni?

 

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