NPLs: the bubble risk in times of crises

If you tell your friends that today the actual problem is how to invest money with the purpose of increasing the revenues, they will make a fool of you. “Well, really? Low wages, a growing unemployment rate, de-stagflation! And you are telling us that the circulating money is too much…”

Precisely it is so.

As a result of Quantitative Easing, large amounts of money are frozen or moving very slowly pending the generation of actual profits by the real economy, which may promote investments.

Non-performing loans are a very good illustration of this anomaly: in the absence of “periodic” investments, the leading players are vying with one another to acquire large amounts of debts, but currently the banks cannot transfer them at the required prices, since the whole system would collapse.

We will resume our activities after the summer holidays and the main issues concerning our market is still the supply and demand gap, which now amounts to 15%. It is too risky to offer higher sums and banks cannot sell crucial loans at lower prices due to provisions and budgetary rules.

Strange enough, this market is running the risk of a bubble as a result of the necessity to purchase and invest. An example of this is represented by the massive attendance of real estate auctions in these months, also thanks to targeted governmental measures. Even unsecured consumer loans are currently acquired at jaw-droppingly prices, due to the poor supply and the necessity to expand the investment portfolios. Obviously, this inadequacy is a relative concept in relation to the amounts of money and the market demands.

This is likely to abnormally inflate the prices, which are not suitable for the free market and are justified by the real economy trends. The excessive liquidity generated by central banks thus becomes crucial for the creation of a closed cycle of investments and speculation and does not lead to any profit.

Thus, assets at unsustainable prices are put back into circulation with the risk of generating a negative spiral. Without the support of a thriving and growing economy, the ill-advised purchase of NPLs cannot be recovered and the ill-advised purchase of an assets will soon turn into an NPL.

In the next months, which will be marked by important events and deadlines, we will be able to realise whether the supply and demand gap has reduced, together with the identity of the main perpetrators of this reduction among the sellers and the buyers.

Emanuele Grassi