ITALIAN CRISIS AT A GLANCE

The Lehman Brothers collapse in September 2008 revealed the seriousness of the crisis and it represents the starting point of the financial and economic crisis. The Lehman Brothers collapse initiated the most dramatic phase of the crisis by bringing about a contraction in the interbank loan market.Banks refused to lend money to each other because of a lack of liquidityand uncertainty about the financial soundness of borrowers. The liquidity crisis induced governments to support national banks with loans, and the European Central Bank cut the discount rate. However, banks reduced the availability of credit to clients to regain liquidity.

At this event, the 2008 financial crisis rapidly developed and spread into a global economic shock, which resulted in a number of European bank failures and stock market declines. Economies worldwide slowed during this period due to tightening credit and drops in international trade,following the rapid decline of economic activity in Europe.Italy was among those Euro area countries which have been particularly struck by the financial and economic crisis in 2008.

The Italian economy is the third largest in the Euro area and the global economic crisis hit Italy harder than expected. The economy was severely hit by the crisis, recording a huge collapse in exports and investment.According to data published in the July 2009 update of the International Monetary Fund’s (IMF) World Economic Outlook, real output growth in Italy contracted by 1 percent in 2008 and 5.1 percent in 2009.

In Italy there are a few large banks and many small and medium-sized banks operating on a regional scale. The crisis touched the larger banks, which lost funds as a result of the Lehman Brothers crash, or found their assets devalued by the stock-market collapse. However, Italian banks were not very heavily involved in highly speculative sectors. The main problem for Italian banks,apart from the reduction in liquidity, came from links with Central and Eastern European countries which is a part of European Union network. There was a risk of the collapse or illiquidity of this part of the network.

Moreover, small and medium-sized banks reacted to the liquidity crisis by reducing credit to clients and consumers and raising the amount of collateral required for new loans. This policy reduced investment in machinery and houses and threatened the viability of small and medium sized firms in various sectors, in particular the more obsolete or export oriented of them. Moreover, credit restrictions and pessimistic outlooks deterred consumers from spending. 2 The Italian Government dealt with the crisis in two main ways: supporting banks to avoid the domino effect of their fall and supporting large firms which allowed them to retain their employees, and cutting public spending.

In November 2008, the Italian Government was introduced the first stimulus package amounting to US$3.8 billion (€3 billion) to counter the contagion effects of the global economic crisis. Based on the above background, this paper will outline Italy’s economic situation in the midst of the current crisis.This paper gives an overview of the evolution of the financial and economic crisis from its very inception in 2008 with the subprime crisis in the US, the current situation of Italy’s economy, including a discussion of the effects of the economic and financial crisis in Italy, and how the Italian Government dealt with the Italian crisis.