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Draghi says Italy needs faster growth

December 7, 2010

By Guy Dinmore in Rome, Published: December 7 2010

Italy must step up its slow pace of economic growth in order to repay its debts, according to Mario Draghi, central bank governor. However, Mr Draghi blamed international debt markets for stirring up a “tempest” that had been “excessive” in some cases.

“Growth is fundamental. Through growth you repay debt,” Mr Draghi said on Monday at a presentation of the bank’s first financial stability report, reiterating a theme that has seen him clash at times with the centre-right government of Silvio Berlusconi, prime minister.

In his foreword to the report, Mr Draghi said: “To preserve the stability of the financial system, the priority today is to adopt policies that enhance the growth potential of the Italian economy,” – a statement likely to be seen as an indirect criticism of Giulio Tremonti, the Italian finance minister.

“As in the other advanced economies, in Italy too the strength and timing of the economic recovery are extremely uncertain,” the report said, noting that a consensus of forecasts for Italy projected 1 per cent gross domestic product growth for this year and 2011 and 1.2 per cent for 2012. The bank notes that Italy’s GDP growth is below the eurozone average.

The report made no mention of the concerns expressed by rating agencies over Italy’s political uncertainty. The coalition government faces a vote of confidence in parliament next week that could lead to early elections in 2011.

Italy’s debt-to-GDP ratio, the second highest in the eurozone after that of Greece, reached 116 per cent in 2009 and is set to hit nearly 120 per cent in 2012.

Mr Draghi did not refer specifically to the sharp rise in Italy’s borrowing costs last week as spreads over German state bonds widened to record levels. He said repricing was “inevitable” but markets had reacted in an “excessive” way and did not always reflect economic fundamentals.

Mr Draghi, who is also chairman of the international Financial Stability Board, said the future of the euro “is not in discussion”, adding: “The euro is one of the greatest successes in the process of European integration and all the countries have reaped huge benefits.”

The central bank’s report said the repercussions of the financial crisis on Italy’s banking sector had “generally been limited” as banks had been protected by a sound business model and a prudent regulatory framework and supervisory model. Nonetheless, Mr Draghi said some banks, which he did not identify, needed to “quickly strengthen” their finances and comply with new capital requirements.

“The risks to banks stem mainly from the weaknesses of the Italian economy, in particular its low rate of growth,” the report said. It also expressed concern that banks could be faced with rising costs in rolling over maturing liabilities, noting that the 30 largest banking groups had outstanding issues of €652bn ($867bn) in October.

Banks’ exposure to Greece, Ireland and Portugal totalled only about €20bn, or less than 1 per cent of “total system assets” at the end of June.

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