Italy's Visco in Election Spotlight as Record QuestionedBy and
Bank of Italy governor to be grilled by lawmakers next month
Visco was reappointed despite criticism from ruling party
As campaigning for Italy’s elections heats up, Ignazio Visco is finding himself where central bankers usually loathe to be: in the political fray.
The Bank of Italy governor was already enmeshed in a first political battle last month when he had to overcome opposition from the ruling Democratic Party to win a second six-year term. As the country heads toward a vote in the first half of next year, things could get much dirtier, touching the Bank of Italy as well as past governors such as Mario Draghi, now European Central Bank president.
“Central bankers are at risk from anti-establishment politics and from mainstream politicians who are struggling to cope with the challenges posed by the populist wave,” Wolfango Piccoli, senior analyst at Teneo Intelligence in London, said in an interview. “The risk is a weakening of those who have put a floor under the crisis.”
The squabbling over Visco’s reappointment and the prospect of seeing the Bank of Italy in the crosshairs of political campaigning next year have already raised concerns among the region’s central bankers, according to two euro-area officials who asked not to be identified as the issue was private. A spokeswoman for the Bank of Italy declined to comment.
In Italy, the focus has been on whether Visco and his predecessor Draghi failed to properly supervise Italy’s ailing lenders, which eventually led to a string of bank failures and bail-outs that shattered market confidence in the nation’s financial system.
In June, the government committed as much as 17 billion euros ($20 billion) to wind down Banca Popolare di Vicenza SpA and Veneto Banca SpA and in July, it got European Union approval to give 5.4 billion euros of aid to recapitalize Banca Monte dei Paschi di Siena SpA.
Those serial bank failures have made Italians increasingly skeptical toward banks. Just 16 percent of Italians have confidence in the country’s lenders, down from an already meager 17 percent in June, according to a poll by the SWG research group this month. Only 24 percent trust the Bank of Italy, plunging from 36 percent in June.
Pressure on the central bank comes as Italy tries to heal the scars of a recession that shrunk its economy by almost a tenth. Though economic indicators show that the recovery is under way, most voters have yet to feel an improvement and the anti-establishment Five Star movement is topping political polls amid high unemployment and banks that are still partly crippled by soured debts.
In the context of the electoral campaign, the issue of soured loans could “add to the skepticism, especially among Northern European countries, about the efficacy of banking supervision in Italy,” said Fabio Balboni, an economist at HSBC in London. “From an investor’s perspective, it increases the perception that Italy takes too long to find solutions to its banking sector challenges.”
By the end of this year, Visco is scheduled to appear before a parliamentary committee which is looking into Italy’s financial system and banking crises. The Governor, Finance Minister Pier Carlo Padoan and market watchdog Consob head Giuseppe Vegas will be heard by lawmakers after Dec. 12, the committee head Pier Ferdinando Casini said on Wednesday.
Following the request of some of its members, the committee will also have to decide whether to call Draghi, who was leading the Bank of Italy in the years when troubles started to build up at lenders like Monte Paschi.
One key concern is the potential implications of a perceived conflict between the central bank and other institutions, according to the two officials.
Italian lawmakers shared this concern last month when they presented a motion requesting the appointment of a governor capable of guaranteeing “new confidence” in the Bank of Italy. The motion was presented by the ruling Democratic Party and the government supported it to avoid a political crisis.
As Italy heads toward elections, politicians have jumped on the apparent inability of Italian officials to defend the interests of savers and businesses before EU authorities, where rules for banks are written. Two of the four main parties on the ballot, the Five Star Movement and the Northern League, have pledged to review the bloc’s fiscal rules and eventually reconsider membership of the single currency.
Even short of an all-out crisis, the parliamentary committee’s action could have far reaching consequences.
Visco provided the committee with thousands of confidential documents showing the central bank’s supervision activity, and a trickle of those have already found their way to Italian media. Some could shed further light on what Draghi knew about the build-up of debt at Monte Paschi.
Bloomberg reported Nov. 2 that, when Draghi was still governor in 2011, central bank officials were aware that the Siena-based lender papered over a loss of almost half a billion dollars two years before prosecutors were alerted to the complex transactions. The ECB declined to comment on the matter.
Bank of Italy banking supervision chief Carmelo Barbagallo told the committee this month that Paschi’s crisis was amplified by fraudulent practices of its former executives since 2008 and reiterated that the central bank’s inspections were properly done over the years. He added that the Bank of Italy didn’t have powers regarding the accounting of transactions such as the derivative contracts and that the matter needed further study.
In a previous hearing before lawmakers, Barbagallo said that problems regarding Popolare Vicenza and Veneto Banca were also mainly due to bad management. He said that supervision of the two banks was appropriate.
“A political crisis in Italy is the single biggest threat to the European economy over the coming years,” said Marcel Fratzscher, head of the German Institute for Economic Research in Berlin. “Italy is too big to save and either a sovereign debt crisis or a banking crisis could pull all of Europe into a deep recession. The ECB’s ability to save Italy from a political crisis is very limited.”
— With assistance by Vidya N Root, and Giovanni Salzano