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MNI (London)
--Former ECB Exec Board Member Warns Govt Delay Risks EZ Reform Influence
By Silvia Marchetti
     ROME (MNI) - Italy's prolonged political turmoil could render the country
unequipped to deal with 'normalization' risks when the European Central Bank's
asset purchase program terminates, former Executive Board member Lorenzo Bini
Smaghi told MNI in an exclusive interview.
     Bini Smaghi warned that the current post-vote vacuum was delaying crucial
decisions that would render Italy more fit for the post-APP era, mainly fiscal
adjustments and building a more resilient banking system. 
     "To make sure that monetary policy normalization, which will eventually
lead to higher interest rates, will be well absorbed by the economy debt
stabilization and reduction, alongside an acceleration in NPL ratio reduction
are necessary", said Bini Smaghi. 
     The former ECB member, now chairman of Societe Generale, argued that "the
debt-to-GDP ratio is not significantly dropping" and that despite efforts
undertaken, "the banking system still needs cleaning up". 
     Italy will only be able to tackle the end of the ECB's APP if the economy
consolidates and public debt is cut, alongside undertaking a more drastic
disposal of the volume of bad loans sitting on banks' balance sheets that are
still stifling a full credit revival, he argued. 
     In his view, across the eurozone all economic indicators point to a
brighter outlook, although a lot of work still needs to be done, especially in
debt-ridden countries such as Italy, that remain the weak links in the chain.  
     The prolonged political impasse in forming a new government is seen by Bini
Smaghi as a destabilizing factor of "instability and uncertainty", and not just
in the long run. Markets might appear to be downplaying the Italy factor right
now, although a closer look bond spreads read otherwise. 
     "We are observing a general shrinkage of spreads due to the large amount of
liquidity so it's important to look at relative, not just absolute, spreads
vis-a-vis Germany. We see that compared to Portugal or Spain, in the past five
months Italy has reduced its spread to a smaller degree," he said. 
     "This is a signal that markets may be complacent but are certainly
attentive to some issues, they're not sleeping," warned Bini Smaghi. 
     Last week, a second round of party talks failed to find a breakthrough,
with president Sergio Mattarella now taking a few more days to decide what comes
next as parties seem incapable of reaching agreement on a governing majority
that could end the stalemate. Risks of another national election now loom large.
     But more is also at stake: Italy's chance to contribute significantly to
key eurozone governance reforms that should see early signs of first significant
movement by the end of this year. If instability continues, Italy risks losing a
big opportunity, according to Bini Smaghi. 
     "Instability and uncertainty about the government means that Italy may not
have a clear negotiating position at the table," he argued. 
     "The debt-to-GDP ratio is not significantly dropping and this is a source
of concern for other monetary union members. The banking system still needs
cleaning up, and this is seen as another obstacle in completing the banking
union with the common insurance scheme," he said. 
     "Italy is a key player but to be a credible negotiator at the table you
have to show to have done your homework and are not in a fragile situation,"
Bini Smaghi argued.
--MNI London Bureau; tel: +44 203-586-2225; email:
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