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The Wine’s Good, But the Rest of the Country Is in Big Trouble Lombardi Letter 2017-11-28 02:40:41 eurozone euro economic slowdown S&P 500 companies U.S. dollar Credit Crisis 2008 The Italian economy is struggling, which is possibly setting up the eurozone for collapse. Here’s the full story. International Markets,News https://www.lombardiletter.com/wp-content/uploads/2017/08/iStock-186965341-150x150.jpg

The Wine’s Good, But the Rest of the Country Is in Big Trouble

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Italy Could Drag Down the Whole Eurozone

Italy, the third-biggest economic hub in the eurozone, is getting closer to outright collapse. How can I say that? I’ve visited the country twice so far this year, and my survey of businesses there paints an extremely negative picture. While my wife says “take out tourism and Italy stops,” I say Italy’s economy is going to stop even if tourism is robust. This is a big problem for the euro and the entire eurozone.

At the end of 2016, youth unemployment in Italy was close to 40%. That’s nearly four out of 10 people under the age of 24 who could work but don’t have jobs.

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Think of it this way: if young people aren’t getting jobs, they can’t afford homes, cars, or sometimes even the basic necessities. The chart below shows how youth unemployment levels were just fine in Italy until the U.S.-born Credit Crisis of 2008 exploded.

Sadly, this isn’t all for the third-biggest economy in the eurozone. Italian banks are still infused with bad debt.

Take Credito Valtellinese (also known as Creval), an Italy-based bank with assets of about €30.0 billion. Despite the bank trying hard to get rid of bad loans, its bad debt as a share of total lending stands at 21%, meaning one in five bank loans is in default. (Source: “UPDATE 1-Shares in Italy’s Creval rise after it cuts bad loan burden,” Reuters, July 14, 2017.)

Creval isn’t the only Italian bank with soaring bad debt. The International Monetary Fund (IMF), a lender of last resort, says “…risks ahead are significant” for the Italian banking sector. (Source: “IMF Urges Italian Banks to Take Further Steps to Cut Bad Loans,” Bloomberg, July 27, 2017.)

The economic slowdown in Italy persists, and the core problems remain. Could Italy be the catalyst that sends a wave of uncertainty across the eurozone and the global economy, just like Greece was few years back? I think it can.

Dear reader; right now we have a situation in which the euro is performing well because the U.S. dollar has been weak since the beginning of 2017. Take the rise of the euro with a grain of salt, because the fundamentals of the euro are gruesome.

Why does this matter to American investors?

Everything is connected these days. The United States isn’t an island without any connection to the outside world. Half of the companies that make up the S&P 500 index have sales that come from outside the United States. If Italy continues to drag down economic growth in the eurozone, and the euro collapses, there would be a major negative impact on the earnings of half of the S&P 500 companies (and their stock prices).

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