Our sister paper, The Malta Independent on Sunday, has broken the news that the European Commission has ordered an ‘in-depth review’ of the Maltese economy.

It has motivated its decision by pointing out that on a first analysis, Malta had been identified as a country that could be facing problems due to imbalances in its financial sector.

In its preliminary review, the Commission identifies three indicators – the state of the island’s public sector debt, the current account balance and government debt – which it fears might prove to be problematic if not tackled.

“Private sector indebtedness exceeds 200 per cent of GDP, mainly reflecting high credit growth to non-financial corporations during the boom years,” the Commission notes.

Reiterating its position, expressed earlier this year, that Maltese banks could be overexposed, the Commission said that “close monitoring of the domestic banking system is warranted due to its high exposure to the property market, which has seen very dynamic price growth followed by a relatively limited correction in the past decade, and the low level of provisions for loan impairment losses”.

According to the EU’s Alert Mechanism Report 2013 released last week, Malta’s financial sector’s growth rate of total financial liabilities has exceeded the indicative threshold several times over the past decade.

According to EU data, the sector’s liabilities grew by 27.9 per cent in 2005, 14.3 per cent in 2006, 22.3 per cent in 2007 and 10 per cent in 2008. Liabilities dropped by 0.4 per cent in 2009, grew again in 2010 by 18.5 per cent and by 1.4 per cent last year.

The report noted that private sector indebtedness exceeds 200 per cent of GDP, mainly reflecting high credit growth to non-financial corporations during the “boom years”.

The report adds, “However, the private sector does not appear over leveraged currently given that households and corporates have sizeable financial assets and the maturity structure of their debt is relatively favourable: around two thirds of it is long-term.”

The Commission is initiating the same in-depth procedure in another 13 member states, including France, Spain, Italy and the UK.

What happens next?

The conclusions about Malta will now be discussed in different Council formations of the EU while the Commission starts its in-depth analysis of the problematic areas.

This will include teams of experts coming to the island to prepare their report.

When this is done, around March, the Commission will analyse the results and decide whether to include any specific recommendations for Malta in May.

The country will then have to incorporate the recommendations into its annual Budget to be presented in 2013.