Matteo Renzi’s Italy falls down the euro league

Try as he might, Matteo Renzi just can’t push Italy’s economy into the eurozone’s premier league. 

Progress in the currency bloc’s third-largest economy has been hobbled by dizzyingly high levels of debt for the government and mountains of bad loans that burden the country’s largest banks and weigh on their stocks’ performance.

Italy is and will likely remain a “problem child within the eurozone,” said Marco Wagner, an economist at Frankfurt-based Commerzbank.

“The problems of the Italian economy and the Italian banking systems are fundamentals, they are genuine problems. They are not cyclical, so not going away anytime soon,” he said.

While the economy probably grew for a fifth quarter at the start of the year, GDP remains 8% below its pre-crisis peak reached in 2007.

Within the eurozone that leaves Italy’s gap second only to Greece in terms of ground to be made up.

The 19-nation region, by comparison, has regained that level, while France and Germany have long surpassed it.

The yield difference, or spread, between Italian 10-year bonds and the equivalent German bund has widened about 40 basis points this year.

Italy returned to growth in 2015 after emerging from its longest economic slump since World War II, and prime minister Renzi is cutting taxes on property and giving lower-paid workers a tax rebate to boost domestic demand.

Still, the Commission cut its 2016 growth forecast to 1.1% from 1.4% this month, citing weaker exports. The Italian data, along with a second estimate for the eurozone, will be published tomorrow.

That period was marked by growing concerns over the nation’s banking system that have since only partially been weathered. Italy’s Ftse MIB Index has lost 16% this year and is the worst performer among all developed markets.

Worries about banks centred on their €360 billion gross amount of non-performing loans, a debt burden that’s hindering lending and stifling profitability.

While Renzi’s government and the Commission agreed in January on a plan to help financial institutions offload the debt, it fell short of what the Italians wanted.

The government also facilitated the creation of a bailout fund known as Atlante.

Its first rescue — earlier this month — ran into difficulties when private investors snubbed an initial public offering by Banca Popolare di Vicenza.

Bank of Italy governor Ignazio Visco said last week that while some of the country’s bankers made mistakes or even committed crimes, the bad loan problem is mainly due to a 25% plunge in industrial output in the six years through 2014.

Renzi also has to deal with a sovereign debt pile that amounted to 132.7% of GDP in 2015.