Deleverage, Balance Sheet Restructuring, and Economic Policy in Italy

Abstract

This study documents and comments on financial assets dynamics in Italy before and after the 2007–08 crisis, based on an empirical observation of twenty-five years of fully integrated sectorial data reporting economic transactions, financial transactions, and revaluation of assets. The empirical analysis strongly suggests that Italy experienced a peculiar form of balance sheet restructuring, different from both the typical balance sheet recession—where private debt deleverage starts as stock prices fall—and the typical low demand recession—where private debt deleverage starts as GDP recovers. In Italy, debt deleverage of both firms and households did not start until 2012, when equity values recovered and GDP fell; moreover, deleverage was not spontaneous, but was triggered by an articulated process of financial wealth reallocation driven by the European Central Bank. Fiscal policy, rather than creating the conditions for economic growth by reducing public debt, created the conditions for private debt reimbursement by compressing aggregate demand. Monetary policy, rather than expansionary, has been functional in recovering and preserving the value of equities while progressively shrinking the debt security market. This combined policy also restored the pre-crisis context of low-income growth, low public expenditure, and structurally high unemployment.