Italy banks start 2016 on wrong foot, experts uncertain of impact on larger economy

So far, 2016 has not been a good year for Italian banks. But it is not yet clear how much of a risk that presents for the country's hopes for an economic recovery.

With the Italian banking sector surpassing 200 billion euros (218 billion U.S. dollars) in bad loans last year, the margin for error for the sector is small. And when the calendar turned to 2016 some investors got spooked, running down share process for banking stocks.

The worst hit was Monte dei Paschi di Siena, Italy's third largest bank in terms of assets and Europe's most indebted big bank. In a span of two weeks, Monte dei Paschi's share value was sliced in half. There were even reports that the bank's depositors had started to withdraw their savings en masse, fearing a collapse.

Those fears have since subsided, and bank shares have rebounded on speculation that the Italian government may be allowed to set up a so-called "bad bank," a government-backed institution that would take some of the non-performing loans off banks' books. The European Commission had blocked Italy's plans for a "bad bank," but reports saying that stance could be reversed have emerged in recent days.

Despite the volatility in the banking sector, signals that Italy may be at the start of a fragile economic recovery continue to trickle in. The economy grew for four consecutive quarters in 2015, the first time that happened since 2007-08, and growth forecasts are for at least 1.4 percent this year. Consumer confidence and home prices are inching higher, the job market is showing signs of improvement, and tourism, industrial production, and exports continue to be boosted by inexpensive oil prices and a weak euro currency.

"The early signs of an economic recovery are there," Oliviero Fiorini, an economic analyst with ABS Securities, said in an interview. "But it's very fragile, very weak. It wouldn't take much to make the train go off the rails."

Could the woes of Italy's indebted banking sector be enough to derail the economic recovery? Analysts said probably not -- for now.

"Technically, there's no direct impact between bank share prices and the health of the economy," said Giampaolo Gabbi, a business studies professor at the University of Siena in Tuscany, told Xinhua. "There may be an impact for shareholders who own bank stocks, and for Italy's image. But the economy itself doesn't feel much of an impact."

When the worldwide economic crisis began in 2008, Italian banks suffered less than their counterparts in other countries, according to Mario Pianta, an economist with the University of Urbino. He said the banks had less exposure to the risky investment vehicles that hurt other banks, and many Italian institutions were conservative in their investment plans. But that has started to change, according to Pianta, due to under-performing loans due to Italy's economic malaise and a lack of supervision by regulators.

Marina Brogi, an economist and expert on financial markets at La Sapienza University in Rome, said the problems would remain contained by the banking sector as long as they are resolved in the medium term.

"If the turbulence lasts for a few weeks there probably wouldn't be any problem," Brogi said. "But if it stretches out longer than that, that would probably mean it's a symptom of something more severe beneath the surface." Endit