10 July, 2020

Do not take risks with economy, Italy’s central bank tells new government

ROME (Reuters) – The top of Italy's central bank warned the brand new anti-establishment government being cautious with public finances to stop upsetting markets and increasing public debt.

Bank of Italy Governor Ignazio Visco told a conference of bankers in Rome that Italy's reform effort had petered out which, if a new economic crisis should hit, it had been now "a lot more vulnerable than we have been Decade ago".

The governing coalition of the 5-Star Movement plus the right-wing League plans sweeping tax cuts and higher welfare spending, but Visco said nervousness on markets and Italy's huge public debt argued to get a cautious approach.

"Prudence and far-sightedness should avoid (market) tensions and also to avoid leaving Italians using a higher debt reducing income in the future," he said.

Italy's public debt, around 132 percent of national output, would be the highest in the euro zone after Greece's.

Visco backed a strategy to pool together Italy's small mutual banks – that this government has suggested it may well suspend – saying the changes will make it simpler for these phones raise venture capital and avoid possible crises.

He referred to as to the finishing of a reform went by the past government forcing the bigger, so-called "popolari" or co-operative banks, in becoming joint stock companies.

Consolidation with the banking sector "remains to be the most efficient tool to handle inefficiencies and guarantee use of capital", he said.

MOST SLUGGISH

Visco said the lowering of bad loans at Italy's banks was proceeding well, together with the valuation on soured credit sold by way of a state guarantee scheme adopted in 2019 amounting to 32 billion euros, and anticipated to rise "significantly" in coming months.

Italy has long been by far the most sluggish economy within the euro zone because the launch of monetary union in 1999. The coalition that took office a few weeks ago says it’s going to make an effort to change Europe's fiscal rules to allow for it to pay out more on public investments, cut taxes and supply income support to your poor.

"There is certainly an excuse for public investments, to get chosen and implemented with maximum efficiency, just as we have a necessity for a diverse and balanced tax reform," Visco said as part of his first remarks since the government stumbled on power.

However, he added that such measures should be "administered with care" to stop a rise in debt, and said "it could be risky to rely only upon them in order to leave the low-growth trap Italy has been in for thus long".

Economy Minister Giovanni Tria, an academic who isn’t associated with either ruling party, has promised the government's program will likely be implemented gradually, while keeping public accounts the best way and lowering the debt burden.

However, speaking with the same conference as Visco, he stated boosting growth was "truth be told important" than meeting public finance targets, and promised to battle against any euro zone reforms that penalized Italy.

He stated that "time is ripe for any sharing of risks" to bolster the euro zone's banking system, and that it was obviously a "mistake" to subordinate the demand for risk-sharing below risk-reduction – a mention of approach liked by Germany.

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