The recovery of the Italian economy is still weak and, to sustain it, "more must and can be done". This was stated on Tuesday morning by Ignazio Visco, governor of the Bank of Italy, in his Final Considerations presented at Palazzo Koch.
“We are emerging slowly, with hesitation, from a long period of crisis – added Visco –, not only financial and economic. The recovery is still to be consolidated. Consensus forecasts indicate that Italy will return to pre-crisis income levels in the near future. The evaluations of the growth potential of our economy are disappointing”.
In particular, the governor underlined that "demand for labor has returned to growth at a rate higher than expected a year ago, affecting areas, sectors and categories of workers excluded from the signs of recovery in 2014 (the new of employment relationships and, to a greater extent today, tax relief)", but "unemployment remains too high" and "a further reduction in the tax wedge on labor" would be necessary, not only to "offer adequate conditions of life for citizens”, but also “to bring inflation back to values in line with price stability”.
At a territorial level, “signs of improvement in the economy have begun to extend to the South – continued Visco -. On the basis of the first available estimates, after seven consecutive years of recession, the product of the southern regions would have stopped its fall. Nonetheless, the gaps with the rest of the country have continued to widen."
COMPANIES TOO SMALL, INVESTMENTS AT THE HISTORIC MINIMUM
According to the governor, "the high incidence of small-sized companies in our production system remains an element of weakness". Meanwhile, "the cost of credit has fallen significantly", but "in relation to GDP, investments are still far below the values observed before the crisis, at minimum levels in historical comparison. Looking ahead, the trend in foreign demand is the main factor of uncertainty: according to companies, geopolitical risks have intensified, which have a negative impact on economic activity, both due to the direct effect on exports and due to the greater caution induce in investment plans”.
RELAUNCHING PUBLIC INVESTMENTS, SUPPORTING THE POOR
To support “a faster and more lasting recovery – said the number one of Bankitalia – the relaunch of targeted public investments is necessary, also in intangible infrastructures, which have been deferred for a long time. The strengthening of incentives for innovation and support for the incomes of the least well-off, particularly affected by the crisis, are important. If the margins available today in the budget are limited, it is still possible to plan the implementation of these interventions over a longer time horizon”.
BANKS: BAD LOANS STILL HIGH, GOVERNANCE INADEQUATE
On the banking side, a weak economic situation and uncertainties of a regulatory nature, "in Italy are added the high number of non-performing loans, which compresses profitability, and inadequate governance structures", underlined the governor.
Visco then recalled some numbers: net non-performing loans are worth a total of just under 200 billion, while net non-performing loans amount to almost 90 billion, “a significant weight, but one that should not be overestimated. It is largely covered by real guarantees, the value of which was carefully examined during the assessment of the financial statements of the major banks in the euro area conducted in 2014. And to these are added personal guarantees”.
GOOD ATLAS, ALTHOUGH WITH LOW RESOURCES
The investments of the Atlante private fund will contribute to the reduction of non-performing loans on banks' balance sheets - the governor then recalled -, which will be able to concentrate on the riskiest tranches of securitisations. Even with relatively limited resources at the moment, Atlante can demonstrate that it is possible to achieve attractive returns by purchasing non-performing loans at higher prices than those currently offered by specialized investors. We believe the fund has the determination, independence and professionalism to meet this challenge successfully; the more he succeeds, the more it will be possible to raise new investments, fueling a virtuous circle”.
BANKS: REDUCE BRANCHES AND INTERVENE ON PERSONNEL COSTS
Visco also underlined that "the business model of the banks based on a widespread territorial presence still needs to be adapted, continuing to reduce the number of branches", which even between 2008 and 2015 decreased by 11%, to 30 thousand.
Furthermore, according to the governor, "for many Italian banks there is still a strong need to intervene on costs, including those for personnel, acting on the quality and quantity of personnel in a manner consistent with market and technological developments".
For banks with more difficulties, these interventions will have to be "even more determined and timely", continued Visco, underlining that "the repercussions on the employees involved can be mitigated also thanks to the recent expansion of the possibility of accessing the benefits of the sector solidarity fund ”.
POPULAR BANKS AND COOPERATIVE IMPLEMENT THE REFORMS RAPIDLY
The governor invited the large popular companies that are turning into spas to complete the process "quickly", because "arriving close to the deadline", set for December 2016, "exposes one to uncertainty". For the reform of the cooperative banks, explained Visco, "the Bank of Italy will rapidly issue the secondary legislation: we expect an equally rapid implementation by the system". The associative component maintains the role of representation "without undue interference on the strategic planning, operational management and control functions of the group".
PUBLIC BAIVING OF BANKS: EU GIVES LARGER MARGINS
The governor then went back to asking the EU for a step back on the limitations on public bank bailouts: “More broad scope should be recovered for interventions of this type, however exceptional in nature. Today the possibility of using public, national or common resources as a tool for crisis prevention and management has almost been eliminated. International experience shows that, in the face of a market failure, timely public intervention can avoid a destruction of wealth, without necessarily generating losses for the State, indeed often producing gains. There is no reason to consider initiatives that help correct market failures without harming competition as inappropriate state aid.
In general, Visco sees weaknesses in the anti-crisis mechanisms set up by the EU in recent years: "There is the danger not only that the national and European authorities are unable to react adequately to large-scale shocks, but that they also have difficulty avoid contagion effects originating from tensions of a circumscribed nature".
Therefore, the number one of Bankitalia points the finger at the "rigid interpretation" that the European Commission has given of the state aid legislation, "not paying much attention to stability and which has also hindered the hypothesis of setting up a company for the management of non-performing loans of Italian banks".
SALE 4 GOOD BANK DURING THE SUMMER
As for the sale of the 4 good banks born from the liquidation of Carichieti, Carife, Banca Marche and Banca Etruria, "it is at an advanced stage - revealed the governor -, it follows rigorous criteria of transparency, impartiality and competition and is expected to be closed during of the summer".
The bad bank into which the non-performing loans of the 4 banks have merged, on the other hand, "is preparing the information necessary for their sale on a competitive basis: the operation will contribute to the development of a market for non-performing loans in our country", explained Visco .
BCE CAN STILL ACT, THERE ARE NO BUBBLES
Excessively low inflation remains for Visco "the main challenge" that the European Central Bank must face: "If necessary we will continue to act - stated the governor - resorting to all the tools available within the scope of our mandate", in order to restore price dynamics in line with the objectives.
The ECB has put in place “measures of exceptional scope” and “the evidence certifies their effectiveness – added Visco -. According to our estimates, in the absence of the measures introduced, both the annual growth rate of prices and that of the Product would be lower, in the area, by about half a percentage point in the three-year period 2015-2017. For Italy the estimated effects are more pronounced”.
As for the problems inherent in the low interest rates established by the ECB, they must be "carefully considered", but at the same time - according to the number one on Via Nazionale - fears in this sense "must not be overestimated", because at the moment there are no signs of bubbles in the euro area: “There is no evidence of excessive rises in share and corporate bond prices or in house prices. Any risks in specific sectors can be tackled with selective tools, without interfering with the orientation of monetary policy”. The depressing effects of low rates on the profits of banks and insurance companies, however, so far "have been contained overall".
BREXIT CAN CREATE DEEP INSTABILITY
The governor of the Bank of Italy then joined the chorus of international voices against Great Britain's exit from the European Union, stating that a possible victory of the yes vote in the June 23 referendum on Brexit "could create profound instability" .
EUROZONE, WE NEED A COMMON BUDGET AND A FUND FOR SOVEREIGN DEBT
At Eurozone level, according to Visco, "a shared budget, which should go through further cessions of national sovereignty and an adequate strengthening of the European legislative function, would guarantee the possibility of implementing policies consistent with the cyclical conditions of the various economies and of the area in the as a whole, promptly and without uncertainty as to their legitimacy. The single currency needs to deal with a single budgetary policy”.
Furthermore, according to the governor, “the effectiveness of a fiscal union requires the introduction of common debt instruments and contextual decisions on the treatment of pre-existing national debts, with a view to a single debt for the area. In the presence of very serious tensions on sovereign debts, already four years ago I stressed here the need to increase common resources. This also through the establishment of a fund in which to bring together part of the sovereign debts, to be redeemed over time with well-defined methods and without transfers of resources between countries, substantiating a form of fiscal union not separated from binding rules, powers of control and intervention".
