MNI SOURCES: Bank of Italy Governor Visco Likely Reconfirmed

--Pre-election Period Raises Instability Risks, Govt Aims For Continuity

--Visco Current Term Expires End-October

--Alternative See BOI Insiders Rossi and Panetta As Contenders

By Silvia Marchetti

     ROME (MNI) - Bank of Italy governor Ignazio Visco is likely to be

reconfirmed for a second six-year term in a sign of continuity and to stave off

possible financial market instability ahead of next year's general elections,

Market News understands.

     Sources close to the government and to the Bank of Italy told Market News

that replacing Visco at such a delicate political moment, when the country is

gearing for the spring election, could be counterproductive and convey a message

of "instability" to markets and international investors.

     But it's not just a political matter. "This is also a very delicate

economic and financial phase", said a source. "The Italian economy is finally

heading towards a 1.5% growth this year and banks are starting to reduce the

burden of their non-performing loans after a triple-dip recession".

     Another top official noted that Visco is likely to be reconfirmed for a

second mandate, and if not, the next governor would most probably be a

high-ranking member within the bank's directorate, chosen from amongst the three

deputy governors and the senior deputy governor, currently right behind Visco in

the Bank hierarchy.

     "One thing is certain; it will be an internal solution rather than bringing

in an external figure like a high-level expert or professor," said the source.

     Visco's mandate expires on November 1 and the government must appoint his

successor, or reconfirm Visco, by October 31, which leaves little time for any

political manoeuvres.

     The decision on who will next head Italy's central bank is largely a

political one. The government has a direct, but not exclusive, say on the

matter, argued an official. The process of appointment does not involve any sort

of vote or election, but is purely made by joint designation from the prime

minister, Paolo Gentiloni, and Italy's head of state, Sergio Mattarella.

     According to Italian law, the prime minister indicates the name of one

single possible candidate and forwards it to the Bank of Italy's Board of

Directors for their opinion. Once the board has expressed their view, the

candidate's name is then sent to the head of state, who appoints the new

governor by presidential decree. 

     Any governor can run for only two consecutive 6-year terms.

     The government's probable decision to keep Visco at his place for another

term will take into account the fact that his departure may be seen negatively

in financial markets.

     Visco has been heavily criticized by many political parties and lobbies for

the way the central bank handled the rescue of several failing lenders this

year. He was even initially probed by authorities for his alleged lack of

supervision in one specific case. The probe against Visco was, however, later

dismissed in absence of elements to proceed against him, with all accusations

dropped.

     In early September, following further severe criticism and media attacks,

the government was forced to formally "renew" its total trust in Visco, through

a statement issued by PM Gentiloni's office.

     Keeping Visco at the head of the bank is the most likely decision due to

other pressing matters such as budgetary deadlines, said a source.

     The timing for finding a quick replacement would come at a difficult time

for Rome, as it seeks to push through the 2018 budget law, with crucial labour

tax cuts and growth-oriented measures, which must be approved and forwarded to

the European commission by October 15 for an initial green light.

     Last week the parliament's banking commission kicked-off an investigation

into the reasons behind the recent bank crises, and Visco may soon be questioned

as part of the inquiry.

     Substituting Visco could be seen as the government partially admitting that

the governor, at the very least, underestimated risks in the banking sector,

explained a Lower House deputy.

     The government also intends to adopt a strategy of continuity and market

reassurance, explained another government source. Gentiloni and Mattarella have

more than once expressed their support for the governor, as opposed to former

premier Matteo Renzi, and frontrunner at the upcoming elections, who had

previously criticised Visco's operational mode but would now be ready to take a

step back and accept a second mandate for the Governor.

     Were Visco however not to be reconfirmed, chances are high that he could be

replaced by one of the other two most prominent figures within the Bank of

Italy: Senior Deputy Governor Salvatore Rossi, previously head of supervision,

or Fabio Panetta, one of three current Deputy Governors, in charge of financial

stability and euro-system matters.

     In his capacity, Rossi might appear to be in pole position as replacement.

He stands in for Visco during the latter's absence or incapacity and has

authority over the bank's day-to-day administration. Rossi is also head of the

country's Insurance Supervisory Authority.

     "It has often the case that the senior deputy governor rises at the helm of

the bank, but it is not the rule," notes a source.

     Panetta however, younger than Rossi, has greater European exposure and that

may give him a winning edge. He's the alternate to Visco on the European Central

Bank's Governing Council, a member of the Supervisory Board of the Single

Supervisory Mechanism at the ECB, as well as being a member of the Board of

Directors of the Bank for International Settlements.

     Panetta is also member of the Committee on the Global Financial System and

in 2011 he became managing director with the task of coordinating the bank's

activities relating to the Euro-system and to financial stability.

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

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