Thread by @MoecGilles

A 1% decline in GDP triggers a 6% rise in the non-performing loans ratio. This matters for the public debt trajectory given the size of the loan guarantees offered to deal with the pandemic in some countries 1/9

In the case of Italy, the impact of the ongoing recession would be consistent with 13% of loans turning “delinquent”. With an average guarantee of 80% if all the envelope is used, this could add another 2.5% of GDP to the deficit 2/9

But more fundamentally, this would add to the risk of a premature fiscal consolidation being ultimately counterproductive 3/9

A discretionary fiscal tightening of 5% of GDP would lift the cyclical component of the deficit by 1.75% of GDP for a multiplier of 0.7 and a cyclical sensitivity to growth of 0.5 4/9

Through the NPL and guarantee channel, the deficit would rise by another 1.5% of GDP. On the whole, 2/3 of the initial fiscal consolidation effort would be lost to these second round effects 5/9

However for the time being the biggest issue is more the low take up of the guarantee scheme on loan origination in Italy so far. Possibly the expectation of rising NPL is a big hurdle for banks, even if 80% is covered by the guarantee 6/9

We will look at the loan origination data for May out late this week for clues. But fundamentally incentivising firms to take more debt - even if necessary at trough - is no perfect substitute to “proper” fiscal stimulus 7/9

Full weekly musings here axa-im.com/content/-/asse… 8/9

And Poscast version here - soundtrack by Genesis (yes, again, but from the Peter Gabriel era so should be OK with the purists) smartlink.ausha.co/macrocast/13 9/9