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Italian Corporate Bad Loans Rising on Slump, Central Bank Says

Italian banks’ corporate loan book will worsen this year as the euro region’s third-biggest economy remains mired in its longest recession in two decades, according to the nation’s central bank.

Non-performing loans as a proportion of total corporate lending will keep rising, the Bank of Italy said in a report on the country’s financial stability. The central bank in November forecast the deterioration would end in the first half.

“Leading indicators suggest that a further deterioration is under way,” the report said without providing a new estimate on when the trend will be reversed. The deterioration, especially in “the construction sector,” is mainly linked to the decline in the economy, the central bank said.

Italy’s economy probably will contract for an eighth straight quarter at the end of June, though the downturn in the first three months eased as exports limited the drop in industrial production, the central bank said on April 17. Still, firms and households are struggling to repay their debts amid concerns about the recession’s length and rising unemployment. Both the Rome-based bank and the Italian government expect gross domestic product to fall this year, by 1 percent and 1.3 percent respectively.

Those forecasts compare with a contraction of 1.8 percent projected by Mooody’s Investors Service and 1.5 percent estimated by the International Monetary Fund.

Austerity, Profitability

The austerity measures passed by former Prime Minister Mario Monti’s government last year allowed for “progress in the field of the public finances,” the Bank of Italy said in today’s report. As Italy’s deficit fell to within the European Union’s target of 3 percent of GDP last year, the nation’s credibility among international investors rose.

“Since the spring of 2012 there has been a recovery in net purchases of Italian government securities by non-resident investors,” according to the central bank’s report.

Still, the tax increases and public spending cuts deepened the recession by reducing the available income of households and the companies’ investments.

Italian banks’ non-performing loans rose 18.6 percent in February from a year earlier as the loans to private sector fell 1.3 percent, the Bank of Italy said April 9.

Italian lenders’ profitability will be low in 2013, today’s report said. It added that the main risk faced by the country’s banks would be a cut in Italy’s credit rating and the consequent reduction in the value of assets they used as collateral with the European Central Bank.

To contact the reporter on this story: Lorenzo Totaro in Rome at ltotaro@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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