By Silvia Marchetti
ROME (MacsNews) – The second COVID-19 wave hitting Europe and in Italy is raising financial stability risks and could worsen the outlook, the Bank of Italy warned Friday in its Financial Stability Report.
Even though summer’s economic recovery was greater than expected also thanks to the support of monetary policy, “the risks to financial stability owing to the macroeconomic situation have increased since the resurgence of the pandemic”, said the BOI.
“This situation is affecting the outlook for growth, which will depend on the effectiveness and decisiveness of economic policy interventions”.
However, financial market conditions in Italy and across the EU have improved greatly since the pandemic breakout and the tensions recorded in the spring have almost completely subsided.
The brighter outlook is mainly due to support by the European Central Bank’s Pandemic Emergency Purchase Programme, (PEPP) and to improved expectations over the recent deal at European level on the Next Generation EU scheme to support ailing countries.
The “temporary” accommodative budget policies adopted by Rome’s government to tackle the pandemic ensures “Italy’s public debt remains sustainable”, according to the BOI.
However, a prolonged high level debt in the long run “leaves the country exposed to future risks stemming from financial market tensions or from new macroeconomic shocks”, warned the central bank.
A path for reducing debt could come from a combination of relaxed funding conditions, effective measures to support growth and a gradual fiscal adjustment consistent with the macroeconomic situation.
In future a gradual fiscal adjustment, topped with relaxed financial conditions and an increase in medium-term growth supported by an efficient use of EU aid would allow Italy’s debt-to-GDP ratio to revert back to pre-pandemic levels in the space of a decade.
Rome’s government policies in favor of ailing businesses and workers have helped to mitigate the pandemic impact but the Italian economy will have to address the risks connected with the increase in the indebtedness of non-financial corporations and with a return to normality.
It is therefore vital that unwinding support measures occurs gradually, noted the BOI.
“In the current climate of uncertainty, removing these measures too soon is to be avoided, as doing so could also hinder firms that are able to survive the crisis. Looking ahead, the effective implementation of measures designed to strengthen firms’ capital and rebalance their financial structure can help to mitigate the risks”.
The main risks for Italian banks stem from the possible deterioration in credit quality and a further decline in profitability, but the rate of new non- performing loans has remained very low up until now, said the central bank, thanks also to more flexible supervisory rules.
Purchases of Italian bonds by foreign investors are growing again after the drop occurred in the first semester of this year, said the BOI.
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Contact this reporter: silvia@macenews.com.
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