Draghi Backs State Backstop for Bad Loans in Key Point for Italy

  • Italian NPLs ‘will take time to resolve,’ says ECB president
  • Draghi speaks after monetary policy meeting in Frankfurt

European Central Bank President Mario Draghi supported a public backstop for non-performing loans, becoming the most powerful euro-area official yet to make a stand on a key issue faced by Italian banks.

Non-performing loans are an obstacle to effective monetary policy and a public backstop would be a “very useful” way of addressing them, Draghi said in response to questions at the ECB’s news conference in Frankfurt Thursday. “Non-performing loans are a big problem for Italian lenders that will take time to resolve,” he said.

While Draghi acknowledged that a decision on how to treat Italy’s NPLs is beyond his remit, his comments reflect concern that the ECB’s unprecedented monetary easing could be stymied by dysfunctional banks. Earlier this month Bank of Italy Governor Ignazio Visco said state intervention to support Italian banks may be needed because of the risk that current difficulties could undermine trust in the nation’s financial industry.

“It seems to be there’s a strong case for Italy to be helped,” OppenheimerFunds portfolio manager Alessio de Longis said on Bloomberg Television. “This is really just a political problem at this point.”

360 Billion

Italian banks hold about 360 billion euros ($396 billion) of troubled loans that are hampering lenders’ profitability and undermining their ability to provide credit to households and companies. Italian Prime Minister Matteo Renzi is exploring measures involving state support for the country’s weak banks after Britain’s vote to leave the European Union exacerbated a selloff in Italy’s lenders.

The issue “needs to be addressed because it’s an obstacle to the transmission of monetary policy,” Draghi said, adding that a public backstop should be agreed to with the European Commission and competition authorities, and be in accordance with existing rules.

Some of the world’s biggest money managers have cautioned on the fragilities of Europe’s banks. BlackRock Inc. Vice Chairman Philipp Hildebrand has argued that the European banking industry requires a broader clean-up like the 2008 Troubled Asset Relief Program, or TARP, in the U.S.

Earlier this month, the ECB directed Banca Monte dei Paschi di Siena SpA, Italy’s third largest lender, to offload more than 14 billion euros of gross non-performing loans over three years. While Monte Paschi is seeking to lighten the load through private means, Italy’s government is in talks with the commission to back the bank’s recapitalization, minimizing losses for its creditors, people familiar with the discussions have said.

“We should be aware that the longer we have this in place, the less functioning will be the banking system, or at least the banks with a high level of NPLs,” Draghi said, speaking about bad loans in general.

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