"Italy's destiny is that of Europe. We are part of a large, deeply integrated economic area, whose development determines ours and at the same time depends on it. It is important that Italy's voice is authoritative in the contexts where I know the future of the European Union will decide”. The governor of the Bank of Italy said so, Ignazio Visco, in final Thoughts on Tuesday 29 May at Palazzo Koch, presenting the Central Institute Annual Report on 2017.
The words of the number one of Via Nazionale take on a particular meaning in the light of the decision taken two days ago by the President of the Republic, Sergio Mattarella, who did not sign the decree appointing economy minister of Paolo Savona, due to its strongly Eurocritical positions. A choice that led the League to blow up the government agreement with the M5S, leading to Giuseppe Conte's step back and the granting of a new assignment to Carlo Cottarelli.
“The rules within which we operate can be discussed, criticized – added Visco – They must be improved. But we cannot ignore the constitutional constraints: the protection of savings (also mentioned by Mattarella to justify the no to Savona, ed), the balance of accounts, compliance with the Treaties. Above all, we must always keep in mind the extremely serious risk of dispersing the irreplaceable asset of trust in a short time and with just a few moves". For this reason, according to the Governor, "if it is desirable that the objectives and projects of the various political forces be defined with clarity and foresight, it would not be wise to ignore financial compatibility".
In reference to today's financial turmoil, for the Governor "there is no justification: what we are observing is serious".
"THE ITALIAN ECONOMY IS STRENGTHENING, BUT WE NEED TO CONTINUE WITH REFORMS"
The Italian economy, according to Visco, “is recovering. Demand reflected the good performance of consumption and above all of investments, which increased by 3,8 per cent but still far from pre-crisis levels. Exports have been confirmed as a driving factor of growth. In 2017 they recorded an expansion of 5,4 per cent, higher than that of the other main euro area countries”. On the other hand, "the consolidation of the results achieved, the achievement of further progress, the removal of structural weaknesses require us to proceed along the path of reform begun".
CITIZENSHIP INCOME, "BEWARE OF THE ACCOUNTS"
The Governor never explicitly mentions the measures contained in the Lega-5 Stelle government contract - an agreement that was shelved, at least until the next elections - but in some cases the references appear evident. It is inevitable to think of the citizen's income when Visco underlines that "in proceeding to strengthen the inclusion income or adopt other measures, in addition to avoiding discouraging the search for a regular job, it will be necessary to pay attention to the consequences on the public finances" .
FORNERO REFORM: "RETOUCHES POSSIBLE, BUT STEPS BACK ARE RISKY"
As for the Fornero law, which Lega and M5S were planning to dismantle, the Governor issues a warning: “The reforms introduced in the past make the dynamics of pension spending manageable; they responded to the need to take account of the lengthening of the average life span in defining the relationship between the contributions paid and the size and duration of the pension; have placed Italy in a favorable position in international comparison. It would be risky to step back. Targeted interventions, aimed at reducing specific rigidities, are possible, some have already been carried out in the past, but they must always be adequately compensated in order to ensure the actuarial balance of the pension system. Extreme prudence must be exercised in modifying the basic rules that determine long-term trends in public spending".
PUBLIC DEBT: "TO REDUCE IT THERE IS NO SHORTCUT"
An early version of the Lega-M5S contract spoke of the possibility of asking the ECB to cancel 250 billion of Italian public debt. But on this terrain, Visco points out, “there are no shortcuts. A large part of the financial savings accumulated by Italians corresponds, directly or indirectly, in the 2.300 billion of our public debt. If the value of their wealth were jeopardized, they would react by fleeing, seeking shelter elsewhere. And foreign investors would be quicker. The resulting financial crisis would make our country take many steps backwards. It would indelibly tarnish Italy's reputation in the world”.
According to the Governor, therefore, the path to follow is another: "The public debt-to-GDP ratio could return below 100 per cent within ten years if a primary surplus of between 3 and 4 per cent were gradually achieved of GDP, about two percentage points higher than the current level and consistent with the substantially balanced budget net of the effects of the cycle. The decline could be more rapid if the improvement in the primary surplus and the consolidation and continuation of structural reforms support growth and reduce the risk premium weighing on the yields of Italian public bonds”.
BANKS: "LACK OF TRANSPARENCY REDUCES CUSTOMER CONFIDENCE"
Visco also referred to the cases of banking maladministration, in particular as regards the placement of subordinated bonds to the retail public. “In many cases – he recalled – insufficient attention to transparency profiles and a discrepancy between the products placed and the financial needs of subscribers, serious in themselves, have amplified the effects of the crises. Preserving customer trust is a duty of intermediaries; it is also a tool to increase competitive capacity; it is essential for the sustainability of bank strategies in the new operating and market environment”.
BANKS: "EQUITY IS STRENGTHENING AND NPLS ARE DROPPING, BUT REMAINING HIGH"
As for the financial situation of the banking system, the Governor underlined that capital solidity has more than doubled since the beginning of the crisis: "In 2017 the solvency ratio (CET1 ratio) grew on average by more than two percentage points, to 13,8 .7,1 percent; it was 1,3 ten years ago. For significant groups, the distance from the euro area average decreased by two percentage points, to XNUMX points”.
On the Npl side, "the coverage rate, i.e. the ratio between the amount of value adjustments and the gross amount of non-performing loans, reached 53% - continued Visco - a significantly higher level than the average of the main banks European".
However, the Governor went on to explain, "at the end of 2017, the ratio of non-performing loans of significant Italian banks to total loans - including interbank and central bank exposures - was 11,1% in gross terms, compared with an average of 4,1% for the other significant groups in the euro area; net of value adjustments, the incidences were equal to 5,9 and 2,4 per cent, respectively. The gap, although still substantial, has narrowed significantly in the last two years”.
The trend is improving above all thanks to NPL sales on the secondary market, which reached 2017 billion in 35, compared to an annual average of 5 in the previous four-year period, while this year they should rise to 65 billion. "According to the plans presented last March to the Single Supervisory Mechanism, by 2020 the non-performing loans of significant Italian groups would almost halve compared to the level at the end of 2017 - explains Visco - the incidence on total loans, net of in value, it would drop to around 4 per cent for significant groups; it is estimated that it would drop to 5 percent for the whole system”.
BANKS: “PROFITABILITY IMPROVES, BUT NOT FOR EVERYONE”
Visco also emphasized the profitability of Italian banks, explaining that it "improved in 2017: net of extraordinary components, the return on capital slightly exceeded 4 per cent against a negative result in 2016 (-5,7, XNUMX percent). The trend continued in the first quarter of this year for the major groups, which recorded overall satisfactory income results thanks to the increase in commissions and cost containment. Several intermediaries, however, still have insufficient profitability. The profit-generating ability of smaller banks suffers from the difficulty of expanding revenues and lower operating efficiency. Furthermore, still high credit losses weigh on it”.
According to the Governor, “the outsourcing of some functions, consortia for the sharing of production processes and for the purchase of goods and services, agreements for the marketing of financial and insurance products, concentration operations can contribute to the recovery of profitability. Small cooperative banks could benefit, as in other countries, from the creation of an 'institutional protection' mechanism, based on mutual support agreements in the event of difficulty, with advantages in calculating capital requirements; it would be a step towards closer forms of integration”.
BCC: "WITHOUT THE GROUPS, LIQUIDATIONS IN THE EVENT OF A CRISIS"
Coming to the cooperative credit banks, Visco believes that “the reform being implemented will make it possible to continue to support local economies effectively even in the new regulatory context, while maintaining the mutualistic spirit that distinguishes them. The solidarity guarantee systems envisaged by the cohesion contracts and the use of capital resources which, thanks to the reform, the new parent companies will be able to raise on the market will make it possible to resolve any difficult situations in the most effective way. In fact, in the absence of the groups, the law would require the crises of individual mutual banks to be managed with liquidation-type solutions. The improvement of efficiency and the removal of obstacles to finding risk capital on the market will allow the groups being created to face the challenges posed by the new context”.
