Visco Says Italian Bad Loans No Systemic Risk as Amount Overdone

  • Net NPLs of banks at risk are worth 15 billion euros
  • Bank of Italy governor confident market solution can be found

Italy isn’t on the verge of triggering a systemic banking crisis as the amount of troubled loans is much smaller than commonly believed, Bank of Italy Governor Ignazio Visco said in an interview.

Banks at risk of facing a capital shortfall, needing a restructuring or a reduction in non-performing loans have net NPLs of 15 billion euros ($16.5 billion), the equivalent of 1 percent of gross domestic product, Visco told Bloomberg in Chengdu, China, after a meeting of G-20 finance chiefs. The loans “are evaluated as if they could be taken care of over time without problems,” but even if they had to be dealt with immediately and written off by half, that would “hardly” trigger contagion for the rest of the world, he said.

Italian banks are under pressure from the European Central Bank to clean up their balance sheets and tackle troubled loans that are undermining lending. Talks between the government and the European Commission over how to recapitalize Banca Monte dei Paschi di Siena SpA and other banks are stuck amid a dispute over whether creditors should face losses if taxpayer funds are used. The results of the European Banking Authority’s latest health check on the region’s lenders due July 29 adding urgency to the debate.

Written Down

Visco said that a “good part” of the NPLs reported to amount to as much as 400 billion euros has already been written down. The value of those with real-estate collateral has been cut to 40 percent, the rate of recovery which has been observed for similar assets in the past years.

The net bad loans “amount to 87 billion euros but they are not all relevant because many banks in Italy are doing pretty well,” Visco said, pointing to Intesa Sanpaolo SpA and UniCredit SpA. “The system at large is not what we should consider.”

Stress Test

“We’ll see what will happen in the stress test,” and whether Monte Paschi “will have to find solutions, either in terms of capital or disposal of the NPLs, in terms of aggregation of banks,” Visco said in the interview Sunday. “I’m confident that these three levels will be considered before a public backstop should even enter into the picture. But it is good that this is even discussed exactly because of the name -- the name is precautionary, you need something just in case.”

Italian Finance Minister Pier Carlo Padoan said talks with the Commission have been “very fruitful” and are “perfectly on time.”

The challenge is to navigate European Union rules stating that creditors must take a hit when banks are rescued, while also seeking to protect small investors from the fallout. German Chancellor Angela Merkel has signaled that she is willing to support a flexible reading of the EU rules to help Italian Prime Minister Matteo Renzi, and ECB President Mario Draghi has embraced a public backstop under exceptional circumstances.

Merkel, Draghi

Merkel and Draghi are right to hold out the prospect of public aid, Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development, said in a Bloomberg TV interview.

“There is awareness about the bailing-in of the creditors,” Gurria said. “We have learned that that has to happen” but “right now we need flexibility” because these are “still hot ashes of an old fire.”

Banks are still grappling with the consequences of the economic recession triggered by the 2008 financial crisis that left businesses and households struggling to repay debt.

“We are working well within the rules but are using all the flexibility allowed by the rules,” Padoan told reporters in Chengdu. “So we are making good progress” but “time is needed to test on the ground new rules and regulations.”

European Commissioner for Economic and Financial Affairs Pierre Moscovici said EU-Italian negotiations on the country’s banks were “part of the discussion of the G-20,” and that he was “confident that we will find ways to address this issue properly.”

Gurria is equally confident that Italian banks’ troubles with bad loans won’t spill over into the broader financial system.

“Contagion happens when you have a problem of psychology, not when you have a problem of non-performing loans,” he said.

Before it's here, it's on the Bloomberg Terminal.