“Italy risks sliding into a recessionary vortex after corporate lending slumped by 5.5pc in December, raising the odds of a fresh debt crisis in 2019 without a shift in policy by the eurozone authorities.
“Data from the European Central Bank on Monday shows that total loans to non-financial companies in Italy have been contracting at an accelerating pace since the insurgent Lega-Five Star coalition took power in June. This has metastasized into an incipient credit crunch over the last two months.
“Italian lenders are now being forced to rein in credit as the ECB imposes draconian capital requirements when the country is already in a technical recession, and in the midst of a serious economic slowdown across the eurozone…
“Lorenzo Codogno, the former chief economist of the Italian treasury and now at LC Macro Advisors, said the economy is “entering a self-defeating loop of negative growth”, with rising deficits and debt ratios.
“He warned that the economy is likely to contract by a further 0.2pc this year, with perilous effects on the country’s knife-edged debt dynamics.
“He said: “I always thought that Italy was one recession away from a full-fledged crisis, as it did not adequately address fiscal and structural issues in the past. Here we are now, with a crisis that looks almost unavoidable.”
“Mr Codogno said the banks are under huge pressure. The downturn is tightening the noose on their non-performing loans, and now the ECB has told them that they must provision fully for all of these bad debts.
““There isn’t enough capital in the Italian banking system to cover this so the ECB is basically saying that the whole sector is bankrupt,” he said…
“The more immediate worry is Italy’s relapse into its third recession in a decade, with economic output still 4pc below its previous peak and the debt ratio 30 percentage points higher at 132pc of GDP. Core inflation is pinned to the floor at 0.5pc, a near deflation trap that makes it even harder to control the debt trajectory.
“The ECB halted its bond purchase programme at the end of December, leaving Italy without a buyer-of-last resort standing behind its sovereign bonds. The political bar in Frankfurt to renewing quantitative easing is extremely high. The institution would do so only after a crisis was already well underway.
“The eurozone still lacks a pan-EMU deposit scheme to break the 2012 ‘doom loop’ between sovereign states and banking systems, each dragging the other down in a self-feeding crisis. “We desperately need to complete the banking union,” said Ana Botin, head of Santander.
“The danger for Italy is that it must roll over or finance €350bn of debt this year on the open market. It is not clear who will step into the breach at a time of net foreign outflows…
“Mr Codogno said the Lega-Five Star budget plans have worsened the structural deficit for years to come with spending on entitlement programmes that do nothing to raise productivity. The supply-reforms that Italy so badly needs have largely been shelved.
““They are going in exactly the wrong direction,” he said. “Pro-growth policies have disappeared. The focus on public investment has vanished. All the fiscal efforts went into the two flagship initiatives of rolling back the pension reform and introducing a basic income for all.”
“Combine this with recession and Italy’s debt trajectory can quickly go parabolic.”
“Economic data from France last week was so bad that one analyst simply wrote “?!” on a chart measuring confidence in the services sector.
“The survey in question was the INSEE services-confidence poll. It showed a cliff-edge drop in expectations from France’s non-manufacturing companies.”
“World trade growth slowed starting early 2018 just when the German auto industry was dealing with a wrenching drop in domestic sales.
“This concurrent hit to two of Germany’s vulnerabilities — overwhelming dependence on buoyant world trade and accelerating obsolescence of its industrial structure — is pushing the economy into recession.”
“Sabine Weyand said of the two years of talks due to end on 29 March: “There’s a very high risk of a crash out not by design, but by accident. Perhaps by the design of article 50, but not by policymakers.”
““We think we can handle it,” Weyand said. “I’m less sure about UK side. For us it’s about EU-UK trade relationship and disruption to supply chains. For the UK a no deal would mean that a part of the regulatory and supervisory structure of economy breaks away – a much bigger challenge.””
“…we’ll be keeping an eye on three areas this year: Chinese corporates, Italian banks and the use of leveraged corporate finance across the world.”
“China’s state planner has been rapidly approving big infrastructure projects, as it looks to give its flagging economy a shot in the arm…
“The acceleration comes after the NDRC vowed to speed up project approvals. This was in response to Beijing last month signalling more stimulus to counter the effect of the trade war with the United States and a broad-based slowdown in the domestic economy.”
“Caterpillar Inc. manufactures huge yellow bulldozers. Nvidia Corp. makes minuscule computer chips.
“Their products have little in common, but their earnings on Monday pointed to the same direction: demand in China is slowing down for a widening range of goods. The world’s second-largest economy, which contributes about a third of global growth, has been weakening for years…”
“Taiwan’s economy continued to weaken as the key economic indicators for December 2018 flashed a “blue” light for the first time since April 2016, indicating contraction, the National Development Council said Monday.
“The NDC composite index of monitoring indicators fell to 16 points for December, flashing a “blue” light, down from 17 points a month earlier when it flashed a “yellow-blue” light.”
“[Australian] Companies suffered the worst slump in conditions since the 2008 global financial crisis as evidence mounts that the economy slowed in the latter part of last year.
“The business conditions index – measuring hiring, sales and profits – dropped to 2 in December from 11 a month earlier, a National Australia Bank report showed on Tuesday. A gauge of employment fell to 4 from 9 in November, while profitability plunged to zero from 8.”
“The US housing market was at the heart of the financial crisis that rippled through the global economy a decade ago. Today, emerging cracks in a property recovery are darkening the outlook for housing-related stocks.”
“Venezuelan opposition leader and self-proclaimed president Juan Guaido ordered congress on Monday to appoint new boards of directors to state oil company PDVSA and U.S. subsidiary Citgo, shortly before the United States imposed sanctions on the firm…
“Guaido, who has not yet appointed a Cabinet, faces the intricate legal challenge of nominating new leadership for PDVSA and its subsidiaries, including Citgo Petroleum, who would manage the companies during a transition.”