Saturday, April 1, 2017

Italy's Banking Crisis Off the Radar - REDUX

A couple days ago I read an interesting and well written article on Wolf Street (Wolf Richter's site) regarding the nearly 1/4 of Italian banks with Texas ratios over 100% (essentially insolvent)...Article Here.  My only critique of the article was that it didn't go on to outline the nature of why Italy's banking system is in freefall...

The general meme outlining the Italian banking crisis usually goes something like this, (to paraphrase from many other articles...not Wolf's)...

"The Italian government wants to increase spending to spur economic activity.  But European leaders, led by Germany, are attempting to enforce rules limiting budget deficits. And Italian banks are holding tight to cash and are reluctant to lend, starving an already anemic economy of capital.

Which leaves Italy and Europe with a catch-22. Europe may never regain economic vigor so long as Italy’s banks are a slow-motion emergency. But Italy’s banks cannot get healthy without growth. And Italy’s economy can’t grow without healthy banks."  And here is where I typically see a mention of many factors, among them some "demographic challenges".

And since rarely do these articles get into the inside baseball, mundane details of why these banks are truly the walking dead...well, that's what I do.  So, in five minutes or less...I'll show why Italy's banks will never get better; population growth and demographic breakdown among that population.

Italy's total population essentially ceased growing about 2010 and is now simply stagnating.  However, the demographic make-up is changing like an incurable, malignant tumor.
Italy's under 25yr/old population peaked about 1975 (yellow column above), has fallen about 7.5 million or 35% from peak...and estimates show only continued contraction going forward.

Italy's 25-54yr/old population peaked about 2005 (yellow column above), has fallen by over a million or about 4% from peak...over the next 25yrs, this population is set to fall another 6 million or another 25%.  NOTE - THIS IS THE POPULATION THAT DRIVES ECONOMIC ACTIVITY, HOME BUYING, EMPLOYS CREDIT...

Italy's 55+yr/old population has tripled since 1950 and is set to peak in 2040 (yellow column above).  NOTE - THIS IS THE POPULATION THAT SELLS ASSETS TO FUND RETIREMENT & IS CREDIT AVERSE.

Below, the total population by segments.  Note the population of young has been consistently, persistently declining for over 40yrs.  It is this persistently smaller population making it's way into the core population that is undermining demand.  Conversely, the 55+yr/old population has more than made up for the declines among the young and is only set for significantly larger quantities.  Equally as troublesome, the economic core of 25-54yr/olds peaked over a decade ago but the population decline is about to really begin picking up speed.  The population that has historically had the income, does the buying, and is attempting to save for retirement is shrinking fast and on course to be surpassed in size by 2020 by the elderly population...also known as the sellers.  Simply put, growing supply from the elderly is set to swamp and overwhelm diminishing demand from the young and core...and if there is any market left in the market...prices typically plunge in that scenario.
Quickly, the chart below shows the annual change in the quantity of 55+yr/old sellers vs. 25-54yr/old buyers.  The widening spread eagle formation since 2005 isn't good (economically).  There are almost 300k new potential sellers annually now against a decline of nearly 200k potential buyers annually, but that's just an appetizer compared to what is coming.
Lastly, what we are now dealing with is a persistent and (at minimum) decades long asset price crushing imbalance.  Banks (many already on or over the verge of insolvency) with outstanding mortgage, auto, or business debt are set to suffer a ceaseless parade of loan defaults as demand suffers and asset prices collapse.  The chart below shows that the number of 55+yr/old potential sellers of assets like homes moves to record quantities against equally large demand declines in core population potential buyers (unfortunately, the employment situation is even worse than the population / demographics).
For those curious about my claim...just check Italian real GDP (chained 2010 euro's) vs. the changing 25-54yr/old core population below.  Without a torrential downpour of new debt in Italy (private or public), Italian GDP will continue down with declining core demand.
Or perhaps you prefer to see how this translates into jobs for the core population vs. energy consumption.
In Italy, and generally EU wide, the next decades will likely be horrific as this imbalance continues to pick up speed.  Ohhhh, the acronyms the ECB must already be inventing to mask the plainly visible population and demographic truth.  The system and banks within it are bust and will only go bust"er" but the ECB will do all it can to stick the bailout bills to anyone and everyone except the bankers, the ECB, and their 0.1% backers.