The shocking state of the Italian banking system has once again made headlines in the financial press. Italy has €360bn of gross non-performing loans (NPLs), equivalent to almost a fifth of GDP, and Street estimates put €196bn of these having collateral backing of less than 60%. While some provisioning has been made, eight years on from the credit crisis, it is simply appalling that a problem of this magnitude has been left to fester and overhang the Italian financial system for so long. Renzi introduced a new bankruptcy law last year which will bring down the time required to foreclose loans and ought to make it easier for investors to buy NPLs from banks. The Government has launched a bank rescue fund, Atlas, earlier in the year to accelerate this process.

Atlas, €4.25bn size, appears tiny in comparison to the problem, especially as 70% of it will be syphoned off to help tottering banks. However, the remaining equity will be geared up and structured in such a manner that it might be about to buy up around €20bn or possibly even €50bn of NPLs if some of the more bullish estimates can be achieved. With the provisioning already made, this leaves banks still saddled with something like €90bn in NPLs. This is more than enough to impair lending across the system and corporations will continue to be shy about extending credit notes to each other while this goes on. Quite how this gap is to be filled is far from clear.

Nominal GDP growth is only just hovering above 0% so there is little that will erode the debt stock and remember Italian public debt obligations amount to over 130% of GDP. Italy has a terrible demographic profile and while unemployment levels have fallen from the post crisis peak, over the last 18 months it appears stuck around 11.5%. Youth unemployment is particularly grim with 37% of 15-24 year olds seeking work. Yet by European standards, the country doesn't even qualify as a basket case.