MNI: ECB MonPol "Recalibration" Reduced EZ Uncertainty - BOI

--Future Of Italian Banks Depends on Economic Growth

--Rise In Interest Rates Not To Affect Italian Recovery If Solid

By Silvia Marchetti

     ROME (MNI) - The European Central Bank's recent monetary policy

recalibration has reduced uncertainty cross the eurozone and the resolution of

several banking crises across the union has helped avoided systemic risks, the

Bank of Italy said Friday.

     In its latest Financial Stability Report, the most important of its annual

publications, the central bank said that "crises at some Spanish and Italian

banks have been resolved, dispelling most of the systemic risks" while

"sovereign spreads have narrowed considerably". 

     Whilst acknowledging that the risks to financial stability stemming from

the international economy were decreasing, the BOI warned, however, that

"lingering uncertainties about economic policies across (world) regions"

persisted. 

     "The very low volatility observed in the financial markets may be a sign of

excessive risk-taking by investors; adverse events could therefore trigger large

fluctuations in security prices," the central bank said. 

     The financial vulnerability of Italian households and firms has diminished

and will continue to do so as the country's growth picks up, added the report.

It could, however, worsen in the very unfavourable scenario of a marked economic

slowdown, accompanied by a rise in interest rates, the report noted. 

     But according to the BOI, an increase in rates, "if consistent with the

improved economic situation", is fully sustainable by the Italian economy: "The

debt service capacity of households and firms should remain strong even if

borrowing costs rise considerably", said the bank.

     The central bank argues that Italian banks and insurance companies have

little exposure to the risk of an interest rate rise and adds that Italy's

debt-to-GDP ratio can be reduced even if rates were to rise, as this would only

gradually affect the average cost of the debt financing. 

     But this must not be taken as an excuse to slow down the pace of fiscal

adjustment: "A high level of public debt is nonetheless a source of

vulnerability and the credibility of the commitment to reduce it remains

crucial," warned the BOI.

     Italy's financial outlook also appears rosier. Risks are diminishing in the

banking sector as lenders boost their solidity and capitalisation levels.

      "The resolution of crises at some banks during the summer has boosted

share prices and reduced the cost of funding", said the bank. "New

non-performing loans are decreasing as the economic recovery continues and the

stock of outstanding NPLs is also falling sharply". 

     A number of bad loan sales have been completed, while others, involving

larger amounts, are currently being finalised. 

     The central bank argued that "over the next few months the most significant

risks for banks remains first and foremost those tied to the economic outlook: a

sharp slowdown in growth would have a negative impact on revenues and credit

quality". 

     Pressure on profitability, which remains low, would make it more difficult

to turn to the markets to for further capital raising. 

     The improvement in the financial situation for Italian households, firms

and banks, along with the consolidation of the public finances, prompted

Standard & Poor's to raise Italy's sovereign credit rating and that of some of

its major banks and insurance companies at the end of October, the BOI noted. 

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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