VZCZCXRO9227
RR RUEHRN
DE RUEHRO #0062/01 0151213
ZNY CCCCC ZZH
R 151213Z JAN 10
FM AMEMBASSY ROME
TO RUEHC/SECSTATE WASHDC 3133
INFO RUEHSS/OECD POSTS COLLECTIVE
RUEHFL/AMCONSUL FLORENCE 3964
RUEHMIL/AMCONSUL MILAN 0407
RUEHNP/AMCONSUL NAPLES 4191
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC

C O N F I D E N T I A L SECTION 01 OF 02 ROME 000062 
 
SENSITIVE 
SIPDIS 
 
DEPT ALSO FOR EEB/IFD/OIA 
 
E.O. 12958: DECL: 01/15/2020 
TAGS: EFIN ECON IT
SUBJECT: ITALY 2010 ECONOMIC OUTLOOK - FRAGILE RECOVERY 
AHEAD 
 
ROME 00000062  001.2 OF 002 
 
 
Classified By: Minister Counselor for Economics George White, for reaso 
ns 1.4 (b) and (d) 
 
¶1. (C)  Summary -- Forecasters expect the Italian economy to 
grow modestly in 2010, with inflation remaining in check. 
Bank lending is still slow and some bank ratings have been 
downgraded slightly.  Having managed the worst of the 2009 
crisis creditably, the GOI will remain primarily preoccupied 
with tight public finances and growing unemployment in 2010. 
Italy's debt load is high but serviceable; Italy is not 
suffering Greece-like troubles.  Post expects Italian 
policymakers, therefore, to focus inwardly in 2010, leaving 
to other governments the advocacy of international financial 
regulatory reform.  Spring elections increase the risk for 
populist economic policy moves. End Summary. 
 
2010 - GOI Navigates Challenging Year 
------------------------------------- 
 
¶2. (U) Economists and the government forecast that Italian 
GDP will grow somewhere between 0.1 percent and 0.8 percent 
in 2010, with most of that growth occurring toward the end of 
the year.  On the heels of the biggest GDP drop (4.8 percent) 
since the 1930's, even modest growth will be a relief. 
Italy's recovery depends on a resurgence of exports, 
especially manufactured goods, to its EU neighbors and the 
US.  Policymakers will thus keep a close eye on Germany's 
prospects (exports dramatically down in December 2009), the 
U.S. economy, and the dollar-euro exchange rate. 
 
¶3. (U) Domestic demand will likely remain subdued in 2010, as 
households feel the pinch of expiring unemployment benefits. 
Sales of durable goods in 4Q 09 were already ten percent 
below the level at the end of 2007. Through 2009 the GOI 
managed a difficult economic climate relatively well, 
mitigating the recession's effect on households, firms, and 
the financial sector with a series of modest, prudent 
measures, such as cash-for clunkers to stimulate demand for 
automobiles, targeted tax relief, and small business credit 
lines and loan guarantees. 
 
Bank Lending Slows Further 
-------------------------- 
 
¶4. (U) According to the Bank of Italy, in November 2009, for 
the first time during this recession, credit to Italian firms 
actually fell (minus 1.0 percent from November 2008), while 
credit to households barely grew.  Previously, credit growth 
had slowed, but remained positive.  The biggest drop in 
lending occurred among the country's five largest banks, as 
they tightened lending standards in the face of worsening 
credit quality, primarily due to bad business loans.  The 
percentage of doubtful and non-performing loans approximately 
doubled since the fall of 2008, according to the Central 
Bank.  While the trend is worrisome, the proportion of 
troubled loans remains modest, at around 2.5 percent.  Still, 
Standard and Poors downgraded several large Italian banks in 
2009 and predicts further downgrades in 2010, although most 
banks' ratings will remain solidly in the 'investment grade' 
range. 
 
¶5. (U) Small, rural-based banks actually expanded credit to 
customers in November 2009, by about 5 percent, or half the 
average pre-crisis growth rate.  Central Bank surveys 
indicate that loan demand will increase in the first quarter 
of 2010, even as banks continue to tighten standards and seek 
to conserve capital.  A bright note in 2009 was large Italian 
banks' success in issuing new commercial paper and raising 
new capital. 
 
No Inflation in Sight... 
------------------------ 
 
¶6. (U) Another silver lining in the 2009 recession was a 
consumer price index increase of 0.8 percent, the lowest 
since 1959.  Forecasters expect inflation to rebound a bit in 
2010, to around 1.5 percent, still well below the average of 
the ought years. Low interest rates also helped some 
household budgets in 2009, since over 80 percent of Italian 
mortgages have variable interest rates. These factors 
actually boosted Italians' purchasing power throughout much 
of 2009, a happy circumstance for anyone who had income 
 
ROME 00000062  002.2 OF 002 
 
 
and/or a job. 
 
... but Unemployment Starts to Bite 
----------------------------------- 
 
¶7. (SBU) Official unemployment reached 8.3 percent in 
November, with the government forecasting a continued rise to 
8.9 percent throughout 2010.  Outside observers such as the 
International Monetary Fund, however, estimate unemployment 
will exceed 10.5 percent and persist into the first half of 
¶2011.  This long and stubborn lag may be due to a build-up of 
excess productive capacity that Italian firms were able to 
mitigate in 2009 by shortening work hours, sending workers on 
mandatory vacations, and placing them in a government program 
(Cassa Integrazione) that provides workers income and 
precludes employers paying high severance costs. 
 
¶8. (U)  As employers tried to stave off layoffs, they also 
accumulated excess inventories, a fact that suggests 
re-hiring will be slow. Also working against a quick job 
recovery will be the relatively high indebtedness of Italian 
firms, with corporate debt equal to about 80 percent of GDP, 
third only to Spain and the UK in the euro area. 
 
Public Finances Still Daunting 
------------------------------ 
 
¶9. (C) The prospect of high unemployment and a yawning 
central government deficit (5 percent of GDP forecast in 
2010) will keep Italian policymakers scrambling to boost 
revenue (without raising taxes) and control spending. The tax 
amnesty the government launched in December in force until 
April 2010 has raised around five billion euros, but has 
probably run its course by now. PM Silvio Berlusconi on 
January 8 raised eyebrows when he suggested cutting tax rates 
as a way to broaden Italy's tax base.  He retreated quickly, 
pledging no tax cuts for the duration of the crisis. 
Meanwhile, his Finance Ministry forecast Italy's debt-to-GDP 
ratio would rise to 118 percent next year. 
 
No Greece Problem Here 
---------------------- 
 
¶10. (C) Central Bank experts foresee no difficulty in 
financing the additional deficit and servicing existing debt, 
however (more septel), as less than 10 percent of it is 
short-term, i.e. due in less than one year.  Bank officials 
told econoffs on January 14 that the GOI had no problems 
issuing new bonds throughout 2009 and even succeeded in 
lowering the overall interest rate on its debt. Italy's 
sovereign credit rating, also recently downgraded by S&P 
(AA-), remains in the 'investment grade' range. 
 
Charity Begins at Home 
---------------------- 
 
¶11. (C) Comment:  Preventing unemployment from dragging the 
Italian economy into a double-dip recession is likely to head 
policymakers' agenda during the first half of 2010.  This 
means that as the various G groupings (G-2, G-20, etc. again 
take up international financial sector regulation and 
mechanisms for sustainable global economic activity , US 
officials will likely find Italian policymakers reluctant to 
play leading roles.  Post expects GOI officials will, rather, 
remain focused on home, alert to the needs of Italy's fragile 
recovery, especially as the Spring regional elections 
approach. Berlusconi,s backtracking on tax cuts was 
encouraging, but we wouldn't be surprised if he comes up with 
some sort of surprise tax cut in the run-up to the elections. 
THORNE