–Adds Comments On Italy’s Public Deficit, Structural Reforms
ROME (MNI) – The European Central Bank must maintain its liquidity
provisions and be prepared for security market intervention in favor of
banks to combat the financial crisis enveloping the Eurozone, ECB
Governing Council member Ignazio Visco said Thursday.
“Since last summer, Europe and Italy have been in the throes of an
exceptionally serious crisis,” the governor of the Bank of Italy said in
remarks prepared for the central bank’s annual shareholders’ meeting
here.
Recent events in the Eurozone have raised investors’ concerns about
the future of the single currency amid a possible Greek exit from the
euro and a dramatic banking crisis in Spain, Visco said, calling for
“effective” financial assistance to states in difficulty and instruments
that guarantee prompt intervention in security markets and in favour of
banks to avoid the fallout from the crisis.
Visco called for “convergent manifestations of unshakable will to
preserve the single currency,” stressing that current yield spreads were
impeding the correct operation of monetary policy and putting financial
stability and growth at risk.
The likelihood of a return to economic growth in the region, which
according to estimates will not expand this year, depends on the
effectiveness of structural intervention and on European cohesion, he
said.
The ECB’s monetary policy operations can help stop spread of
financial instability and possibly avert a systemic crisis, but cannot
redress all the imbalances in the Eurozone, he said.
“The primary objective of the euro system is to ensure price
stability over the medium term,” Visco said. “Under the treaty, it
contributes to preserving the stability of the financial system. When
financial stability is jeopardized, price stability itself is put at
risk.”
In order for the single currency to survive over the long term, a
political union among member states is necessary, he argued. “A path
must be charted with political union as its ultimate goal, and each step
marked along the way.”
Italy will also face an “inevitable” recession this year due to
financial uncertainty and the drastic consolidation measures introduced
earlier this year by the government, Visco said. Europe’s third-largest
economy is expected to contract by at least 1.5% this year, he
estimated.
The measures were introduced by Prime Minister Mario Monti,
appointed in November to replace a discredited Silvio Berlusconi, who
was seen as having failed to resolve Italy’s spiraling debt crisis.
Monti’s popularity has since slumped amid the country’s year-long
economic recession and the ongoing debt concerns.
Austerity measures like tax increases and cuts in government
spending on salaries and pensions will likely further dampen spending
and aggravate the recession. Some E20 billion in austerity measures have
been introduced as the government struggles to decreased the budget
deficit and keep public debt from spiraling out of control.
Italian government debt rose to a record E1.946 trillion euros in
March, according to Bank of Italy figures released earlier this month.
The stability of Italian banks has been ensured by low exposure to
structured finance products, a relatively low level of leverage and “a
high proportion of capital instruments effectively capable of absorbing
losses,” Visco said.
“However, the credit system is feeling the repercussions of two
sharp recessions in three years and the sovereign debt strains,” he
acknowledged.
The Italian banking sector has been strengthening its tier one
capital ratios in recent years. The core tier one ratio of the largest
five lenders has risen to 10% from less than 6% percent in 2007. The
average for the banking sector is also currently 10%.
Italy is working on creating an orderly public sector, an efficient
banking system, and a competitive productive system, Visco said, calling
the budget action taken so far “rapid and decisive.”
In fact, Italy’s deficit is expected well below 3% this year and
near structural balance next year, he said. Public debt is expected to
start falling next year, also thanks to the recently introduced pension
reform.
“We have nonetheless paid the price of raising the tax burden to a
level incompatible with rapid growth,” Visco said. “This increase can
only be temporary.”
Visco said further structural reforms in education, health and
justice were required, saying that if they are “based on equity, they
will not prejudice growth.”
“Getting out of this tight spot will impose costs on all of us,”
he said. “The journey will not be short.”
The European Commission on Wednesday singled out Italy as a country
with “serious” problems. Italian business confidence fell in May to the
lowest levels in almost three years amid a sharp drop in orders and
production outlook.
– Alina Trabattoni,
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