Italy experienced a similar but much less dramatic increase from 6% pre crisis to 17% today. Publically traded Italian banks account for nearly half the nonperforming loans in the Euro Zone. Given the perilous state of Deutsche Bank, its continued slide towards insolvency and the high level of Italian nonperforming loans could easily become the trigger for the next crisis.
One of the hazards of the Fed’s ZIRP or Zero Interest Rate Programs is that it forces investors to take considerably higher levels of risk in order to maintain investment return. This is particularly troublesome for pension funds, many of which count on a 7-8% annual return. I’ve discussed the folly of that previously. In 1995 it was relatively easy to assemble a low risk portfolio of bonds that paid about 7.5%. By 2005 that same portfolio included about 50% of its assets in stocks, real estate and other higher risk investments to maintain the desired 7.5% return. By 2015 the bond percentage had slipped to just 12%, while the other 88% went into higher risk investments including private equity and foreign stocks. As such it’s no surprise that pension funds by and large regularly miss their investment return targets, earning about 4.5% instead based on actuarial studies.
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