In the summer of 2020, many in the capital markets thought the worst was yet to come. Specialist mortgage lenders had seen 40% of their books eaten up by payment holidays in some cases, bringing worries of a 2008-style market crash, whereas Andrea Enria, chair of the Supervisory Board of the ECB, was saying that NPLs in the euro area could reach €1.4bn.
That has not come to pass. Instead, things are looking pretty good. In Italy, for example, defaults are down.
For outstanding auto ABS from Italy, rating agencies Moody's, Fitch and S&P have upgraded 12 deals between them during the first half of the year.
Italian NPLs were €71.2bn in May 2020, according to DBRS. But rather than head back to the giddy heights of 2017, when they topped €203bn, they had fallen to €52.1bn by April. That was in stark contrast to the fears a new wave of NPLs to follow the initial wave of lockdowns.
Is it too early to celebrate? Most definitely. But it is not too early to point out that things aren’t looking as bad as they feared 12 months ago.
The success of the payment moratorium schemes will likely mean that no 2008-style credit crash is due. Covid-19 was never a financial crisis akin to the 2008-09 vintage, but the fears were real enough.
So far, restraint has gone a long way. Many people have increased their savings during the pandemic, allowing debt-backed financial instruments to be repaid.
If Italy proves to be a test case of what is to come, then Europe can breathe a sigh of relief.