M.Paschi CEO sees loan crunch if spread not tamed soon-paper

MILAN Aug 11 (Reuters) - Italian businesses will run into serious credit trouble if the spread between Italian and German bonds is not tamed by the end of the year, the Chief Executive of Italy's No.3 lender Banca Monte dei Paschi di Siena said on Saturday.

The rise in Italy's borrowing costs on the sovereign bond market, measured by a widening spread, has dragged up interest rates on bank loans to Italian industry making it more expensive to compete against countries with stronger finances like Germany.

In an interview with La Repubblica newspaper, Fabrizio Viola said that if by Christmas European governments and the European Central Bank had not succeeded in reducing the spread "there is the risk of a marked contagion for the economy".

"We risk a loan tsunami," the newspaper quoted the CEO as saying.

Bad loans at Italian banks are on the rise as the recession and credit squeeze make it increasingly difficult for Italian companies to fund their businesses.

In its recent monthly bulletin the ECB warned of an insolvency risk for Italian industry.

Viola said the businesses most at risk were smaller firms that worked on the domestic market producing goods and services, especially those with short-term debt.

He said the ECB and Europe's rescue funds (EFSM and ESM) needed to buy the sovereign bonds of countries that were "fiscally sound but subject to financial tension" on primary and secondary markets.

Asked about Monte Paschi half-year results due later this month, Viola said he did not see any signs of a change in the weak trend for bad and problematic loans.

"These problems will stay with us for the whole of 2012," he said. (Reporting By Stephen Jewkes; Editing by Jon Loades-Carter)