The launch of Italy’s state asset management company — often referred to as a bad bank — is imminent, according to central bank governor Ignazio Visco, despite long delays for the project.
Italy’s banks are groaning under a burden of non-performing loans, one of the worst in Europe. That makes it difficult for them to extend new loans and stimulate growth in the country’s long-stagnant economy. Real GDP is at the same level as in 2000.
Visco said bad debt was “still putting a brake on lending in Italy”. Meanwhile, banks are being obliged by regulators to raise their capital ratios — another disincentive to increasing lending.
Italy’s government has passed laws this year to reduce the fiscal cost of writing off loans and ease rigidities in local bankruptcy procedures. But Visco said these measures were “not enough” to solve the problem, given the country’s shallow secondary market for NPLs.
“If the asset management company is not launched soon, the risk is that banks which might otherwise take advantage of the other provisions will wait for the entity to be established. That’s why we need to have it relatively quickly,” he said.
One problem the government and Bank of Italy are discussing with the European Commission is how to ascribe a market value to illiquid loans — to ensure the EC does not class the initiative as state aid — in the absence of an existing market for such loans. Visco said the state’s role in the asset management company was in any case only to “help and organise something that is mostly private”. State guarantees, rather than a simple equity injection from public funds, could also be a possibility, especially considering public opposition to a scheme that might be seen as a bank bail-out.
The authorities in Italy are already talking to private investors interested in buying into the initiative, according to Visco. “This is going to produce returns,” he said. “An asset management company is not going to bail out the banks at the cost of the taxpayer, but it should improve the functioning of the market and [by extension] help them dispose of these loans.”
Visco, who sits on the European Central Bank’s governing council, also underlined the need to press on with quantitative easing to tackle deflation, saying “global risks are materializing”, particularly in emerging markets.
This view contrasted with Bundesbank board member Andreas Dombret telling Emerging Markets yesterday that though he was “on track with” the ECB’s policy, he was “not a fan” of QE and saw risks in it.
Visco said the eurozone’s slip back into deflation in September was “mostly due to energy prices”, which he said was temporary, but could have second round effects. Core inflation (excluding oil) was around 1%, he noted — still below target. “If inflation expectations are disanchored, you may have second round effects of the fall in commodity prices.”
Italy’s exports had benefited from a weaker euro due to QE, Visco said, but he noted that the currency had, since April, regained about half its fall in the previous six months.
“The cost of credit [in Italy] is going down, following the very easy monetary policy that we have put in place. Whilst there is some financial fragmentation [between the eurozone core and periphery] it has reduced substantially. Things are going in the right direction, but there is still a lot to be done.”