Italy banking: Inside Cassa Depositi e Prestiti

By:
Philip Moore
Published on:

State-backed Cassa Depositi e Prestiti's (CDP) mission to jumpstart the Italian economy has been met with scepticism. CEO Fabio Gallia tells Euromoney why he is convinced it will succeed, while fears over Italy's NPL conundrum and bank-restructuring saga refuse to abate.

Cassa Depositi e Prestiti-600

When you step through the main entrance at the Rome headquarters of CDP in Via Goito, the first thing you notice is a digital countdown clock. This tells you in continuously updated detail how much time the Cassa has left to implement its grand plan to breathe life into Italy’s moribund economy. 

When Euromoney visited, the clock indicated that CDP, which is 80% owned by the Italian government had 1732 days, or 149,656,308 seconds to achieve its objective. The Cassa will certainly have its hands full over that time. After all, Italy’s National Promotional Institution acts as a "key instrument for the central government to implement its financial policies," according to Standard & Poor’s (S&P). That is quite a responsibility.

On paper, CDP’s blueprint for supporting economic growth over the next five years is a good plan. If it is implemented successfully, the plan will make a meaningful contribution to the recovery of the Italian economy and to job creation in a country where youth unemployment, in particular, remains high. It will also help Italy to strengthen its capital market, overhaul much of its crumbling infrastructure and attract foreign direct investment.

Guidelines business plan 2020
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Source: Cassa Depositi e Prestiti

The bare bones of the scheme, which were announced at the end of last year, are that between now and 2020 new resources amounting to more than €260 billion ($294 billion) will be channelled into various pockets of the Italian economy. Some €160 billion of this will come from CDP’s own resources, most of which are generated from savings deposited at the Italian postal bank. The rest, according to CDP’s business plan, will be made up of "additional national and foreign private and public sources."

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Fabio Gallia, CDP

The bulk of this total (€163 billion) is earmarked for investment in "enterprises", which CDP’s CEO, Fabio Gallia, says have been neglected in Italy. "We see the shortage of venture capital as a clear market failure in the Italian economy," he says. "Only Greece lags behind Italy in this area. CDP will aim to work with enterprises across their entire life cycle – from birth through to a possible IPO."

Of the balance of the funding plans set out in the 2016-20 plan, €68 billion will go into infrastructure, which CDP says will help Italy to "raise its game" in bridging the gap between its infrastructure and the rest of Europe’s. This leaves €20 billion for local governments and €15 billion to put towards real estate, which includes housing and tourism.  

Italy needs every penny. True, its economy is on the mend, with recent industrial production and consumption data surprising on the upside. Equally true, the longer term outlook has been brightened by the programme of structural reforms introduced in 2012, most notably in the labour market. The OECD thinks that within five years of their introduction, this bundle of initiatives will lead to GDP being 3.5% higher than it would have been in the absence of reforms. Over the same period, the OECD expects that 340,000 new jobs will be created.

Despite the good news, Italy remains an economic headache for Europe’s fragile economic union. "High government debt and protracted weak productivity dynamics imply risks going forward," was the warning sounded in March by the European Commission (EC), which is jittery at the prospect of Italy failing to comply with 2016 Eurozone budget discipline requirements.

Its economic performance since joining the euro has done little to resolve Italy’s debt problem. As Lombard Street Research commented in a recent update, while the euro area has grown by 18% over the last 15 years, Italy’s real GDP has stagnated. Gallia, who took over as CEO of CDP last summer, is under no illusion about the damage that has been done to Italy’s economy since the global financial crisis. "The growth numbers were up last year, but in the eight years following the crisis we lost 10% of GDP," he says. By 2014, he adds, car sales, cement production and turnover in the real estate market were all back to the low levels of the 1960s and 1970s.

Those losses will take a while to reverse, although Gallia is confident that Italy’s economy is sufficiently broad-shouldered to sustain a long-term recovery. "This is still the second largest manufacturing base in Europe," he says. "The resilience of the economy is reflected in the fact that we went through the recent economic crisis without any public disorder."

Deep-seated problems

More immediately, one of Italy’s main priorities is to address the deep-seated problems in its banking industry. The most visible of these is the mountainous stock of non-performing loans (NPLs), which now represent about 23% of GDP. According to numbers published by Moody’s, this total has risen sharply from €132 billion in 2009 and €236 billion in 2012 to about €350 billion today, meaning that around 18% of the loans in the entire banking system are non-performing.

Italy’s answer to its NPL conundrum is a guarantee scheme (Garanzia Cartolarizzazione Sofferenze, or GACS). Lorenzo Codogno, former director general of Economic and Financial Analysis and Planning at the Ministry of Economy and Finance in Rome, thinks the Treasury’s initial estimates of how many dodgy loans will be shifted from banks’ balance sheets were "far too optimistic". Codogno, who has recently set up an independent economic research company, LC Macro Advisors Limited, says the GACS initiative should be regarded as an additional instrument in the toolbox available to banks cleaning up their balance sheets, but not as a silver bullet.