Eurozone’s third biggest economy may not recover from 2008 financial crash until mid-2020s, according the fund’s annual report

The fragile state of Italian banks in the fraught post-Brexit financial climate has been highlighted by the International Monetary Fund, in a stark warning that the eurozone’s third biggest economy will have suffered for almost two decades before it starts to recover the ground lost since the 2008 financial crash.

Italian banks suffered fresh heavy losses on Monday as the European Union insisted that Matteo Renzi’s centre-left government abide by state-aid rules that limit Rome’s scope to provide help to banks burdened by the non-performing loans (NPLs) caused by economic stagnation.

The IMF said Italy was “recovering gradually from a deep and protracted recession”, but said the healing process was likely to be “prolonged and subject to risks”. It used its article IV consultation – an annual economic and financial health check – to stress that Italy was vulnerable to a cocktail of threats that could have knock-on effects for the rest of Europe and the world.



The IMF’s forecast says it will be the mid-2020s before Italy’s economy returns to its pre-2007 levels. During this period of slow recuperation, the country would grow relatively poorer compared with other eurozone countries, while its banks would continue to be heavily exposed to economic shocks.

“Downside risks arise from delays in addressing bank asset quality, intensified global financial market volatility – including from Brexit, the global trade slowdown weighing on exports, and the refugee influx and security threats that could further complicate policymaking,” said the IMF.



“If downside risks were to materialise, regional and global spillovers could be significant, given Italy’s systemic weight.”

Britain’s vote to leave the European Union has led to investors focusing on the problems of the Italian banking sector, fearing that renewed turmoil in the eurozone will lead to lower growth, a fresh wave of bankruptcies, and an increase in NPLs. Unicredit, Italy’s biggest bank, has lost a third of its value since 23 June, and its shares fell by almost 4% on Monday.

The IMF said: “With the economy turning around, non-performing loans appear to be stabilising at about 18% of loans, one of the highest in the eurozone.” These bad debts, it added, meant that profit margins in Italian banks were among the lowest in Europe and were also affecting their ability to lend.

Italy’s lenders have been struggling for months to unload €360bn (£306bn) of NPLs – about a third of the eurozone total. These have built up steadily since the start of the global financial crisis nine years ago, a period that has seen Italy’s national output fall by 10%.



The IMF said Italian banks had raised more money during 2015 to boost their financial resilience, but still had capital ratios that were below the eurozone average. It noted that despite further measures imposed on a few specific banks, concerns about NPLs and weak profitability in a period of low interest rates, Italian banks had “come under intense market pressure, losing over 40% of their market value this year”.



The report highlighted other weaknesses, including low productivity and investment growth, an 11% unemployment rate, and a national debt that had risen to 133% of GDP, limiting the scope for Renzi’s government to use tax cuts or higher public spending in an attempt to boost growth.

Italy is in talks with the European commission to allow public support for its weakest lenders, including Monte dei Paschi di Siena. State aid to banks is allowed by European Union rules only in exceptional circumstances, when “a serious disturbance” emerges in the economy.

Rome has sought to turn up the pressure during the bank share sell-off since Brexit, with Ignazio Visco, Italy’s central bank governor, stressing that the Italian government could not rule out state help. But this idea has been received coolly in Brussels; the leader of eurozone finance ministers has said that the problems of the Italian banks are not yet serious enough to allow Renzi to override state-aid rules.



Only under exceptional circumstances can an EU government provide public support to an individual business or a sector of the economy, due to concerns that bailouts would be used to stifle competition. But Eurogroup president Jeroen Dijsselbloem said he saw no “acute crisis”: “There are issues of non-performing loans in Italian banks, but that’s not a new issue,” he said. “The rules are clear and they are strict.”

Amid signs that Italy might be prepared to have a confrontation with the EU, the country’s finance minister, Pier Carlo Padoan, said Rome would safeguard the interests of savers. The government faces a close-fought referendum on constitutional reforms later this year, on which Renzi’s political fate hinges, and is wary of angering small investors.