May 14, 2018 / 3:34 PM / a year ago

Bank of Finland's Rehn sees 'downside' risk to euro area economy

(Reuters) - The euro area’s economic outlook is strong but it faces “downside risks” due to uncertainty relating to the public finances and banks of some member countries, the man chosen to head the Bank of Finland said on Monday.

Olli Rehn, the European Union’s former top economic official, sounded a cautious note in his first major speech since being selected to replace Erkki Liikanen in Helsinki and on the Governing Council of the European Central Bank from July.

“Currently, risks to the medium-term economic outlook seem to be tilted on the downside,” he told an event at the Italian banking association in Rome.

“Internal risks relate to uncertainties surrounding the implementation of reforms in the euro area, and to the public finances and banking sectors in some member states,” the Bank of Finland’s deputy governor added.

The ECB’s current policy message states that risks are “broadly balanced” and are associated to external factors such as protectionism.

Rehn spoke in Rome as Italy’s 5-Star Movement and League neared a deal that would bring together two parties which want to challenge Europe’s rigid budget rules and boost spending.

He also delved into the two main issues for Italian banks: the burden of unpaid, or non-performing loans, inherited from the economic crisis and their pile of Italian government debt.

Rehn said the former should be handled “with a combination of bail-in and recapitalization by national funds” while banks with “high amounts of a single country’s sovereign bonds” could be asked to have more capital.

Reporting By Francesco Canepa; Editing by Balazs Koranyi

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