ROME/MILAN (Reuters) - Some Italian banks face probable difficulties and shareholders must be ready to dilute their stakes and encourage mergers, the country’s central bank governor said on Friday.
Bank of Italy Governor Ignazio Visco said in a keynote speech that Italy’s banks had been weakened by the euro zone’s sovereign debt crisis and ensuing recession and some are now “at risk of being in difficulty.”
Visco did not specify which banks he was referring to.
Italy’s longest post-war recession has created a vicious circle of rising bad debts for its banks, which have tightened the screws on credit for firms and households.
Bad loans exceed 130 billion euros and are expected to keep rising throughout the year, though recent figures from Italy’s two biggest lenders, UniCredit (CRDI.MI) and Intesa Sanpaolo (ISP.MI), showed a slowdown in the first quarter of 2013.
Visco, who ordered an audit of the country’s top 20 banks between the end of 2012 and early 2013, said coverage levels of bad loans had improved to 44 percent but needed to be maintained and in some cases improved.
He called on banks’ shareholders - the politically connected foundations that control the country’s largest lenders - to be ready to forego dividends, “and accept dilution of control, where necessary encouraging mergers with other banks.”
Visco defended the central bank’s supervision of the industry and said the capital base of Monte dei Paschi di Siena (BMPS.MI), which has received a 4.1 billion euro state bailout, was currently adequate.
However, he said the loans, with their interest rate of 9 percent rising to 15 percent, were “onerous” and the achievement of the bank’s restructuring plan could not be taken for granted.
“Its success will depend in part on economic and financial developments in the country as a whole,” he said.
Visco, who sits on the European Central Bank’s governing council, told the Bank of Italy’s annual assembly that the ECB stands ready to take further policy action to help the euro zone economy.
The ECB this month cut its main refinancing rate to a record low of 0.5 percent.
“The Governing Council stands ready to intervene again as new information becomes available and to consider all possible measures for maintaining credit conditions throughout the area consistent with its monetary policy stance,” Visco said.
Visco is considered to be a dove on the ECB’s council, but his comments on “all possible measures”, suggest the bank will be open minded about potential policy options for addressing economic weakness in the euro zone.
U.S. Federal Reserve policy-maker James Bullard recommended last week that the ECB could consider quantitative easing (QE), or printing money for asset purchases, though no ECB member has yet taken up this suggestion.
However, monetary policy is not enough to solve the euro zone’s economic difficulties, Visco stressed, calling for a time line to be laid out for the creation of a common euro zone budget and possible common debt issuance.
“The institution of common mechanisms of financial support for structural reforms in single member countries can constitute the occasion for the launch of the project and the issue, on a trial basis, of joint debt securities,” he said.
He warned that the pace of reform in Italy had slackened over the past year and called for Enrico Letta’s new government to quickly set out new objectives while not straying from fiscal discipline.
Italy has no scope to loosen fiscal policy this year, he said, despite a European Commission recommendation that it exit the EU’s excess deficit procedure which imposes corrective action on countries whose budget deficits are deemed too high.
“It would be illusory to imagine we can overcome the crisis by means of budget deficits,” Visco said, listing a string of data to underline the depths of Italy’s economic slump in the last five years.
Gross domestic product is more than 7 percent below its level at the end of 2007, households’ disposable income is down by more than 9 percent, industrial output is down by a quarter and hours worked are down 5.5 percent.
Reporting by Gavin Jones