In the first of what we imagine will be many targeted fiscal policies to alleviate the economic stress from the Coronavirus panic, news from quarantined Italy this Tuesday morning.
Via the FT’s Miles Johnson:
Italy’s deputy finance minister has said the government will suspend mortgage payments and other household bills across the entire country during the coronavirus outbreak.
Laura Castelli, part of the Five Star Movement side of Italy’s coalition government, said in an interview with Italian state radio that the government had been working with the country’s banks in recent days to prepare for the suspension.
The measures will halt payments for tax bills and interest payments for small companies and individuals during the crisis. She did not specify how long the suspension would last.
How this policy will be funded is not clear, but if the cost is borne by the banks it does raise a question of whether it’s a net positive outcome for Italian citizens, given the circular nature of its banking system.
The first thing to note is that just 13 per cent of all Italian households had a property with an outstanding loan or mortgage against it, according to 2018 data from Eurostat. For comparison, in property-obsessed UK the figure is 27.6 per cent. So we’re already talking about relief for a small subset of Italian families here, relative to the rest of Europe.
Or are we? The Italian bank bond market, as our former colleague Thomas Hale pointed out, is popular with its citizens. An IMF report from 2016 estimated that €200bn of Italy’s bank bonds were owned by households.
A recent €200m bond issuance by Popolare di Bari speaks to this trend: the minimum that could be invested in the bond was an affordable six euros, around the cost of three Morettis:
At the end of 2019, Italian banks had €382bn of mortgages on their balance sheets, according to the Bank of Italy.
So we’re in a potential situation where banks may have to defer collecting mortgage payments, shunning income which is used to pay bondholders, who may turn out to be the very citizens who the policy was designed to relieve in the first place. In one pocket, and out the other.
It’s important to stress that this is all theoretical. It could be the case that the Italian government, under laxer fiscal constraints from the EU, pays the interest costs in lieu of its citizens. Another possibility is the banks accrue the deferred interest payments over the designated relief period, and then collect the payments over a period of time, say two to three years, which doesn’t impact household spending, or banking revenues, too much.
One thing is for certain, Italy continues to be a place that proves the axiom that banking is inherently a political business, regardless of whether it wants to be.
BREAKING: RBS just announced similar measures in the UK, we’ll see how that one plays out.
Don’t hold your breath for the same here. Pun intended.