The International Monetary Fund has noted that “very high” amounts of non-performing loans and slow judicial processes were straining bank balance sheets and have called for action over concerns relating to the bail-in of retail investors in Italy.

The IMF said in a statement following its regular review of the Italian economy that financial industry reforms “are critical to entrench financial stability and support the recovery.” NPLs appeared to be stabilizing at around 18 percent of total loans, said the Washington-based fund.

“Concerns related to the bail-in of retail investors should be dealt with appropriately,” the IMF said.

The question of whether creditors should face losses if taxpayer funds are used has resulted in a stalemate in the talks between Italy and the European Commission to recapitalize Banca Monte dei Paschi di Siena SpA and other banks, several media reported recently quoting sources familiar with the discussions. Through a process dubbed a “bail-in”, bondholders and shareholders need to absorb losses in failing lenders in the event of a rescue according to rules that took full effect this year.

The sources said that the Italian government wants to be allowed to bolster lenders when capital gaps emerge in stress tests according to a precautionary recapitalization under the European Union’s bank-resolution rules which is favored by Italy.

“After what happened with the departure of the U.K., in my view it’s fundamental that there should be common sense in Europe,” Prime Minister Matteo Renzi said in a broadcast interview when referring to the June 23 Brexit vote.

The banks were called on to “return to lending to artisans and small businesses” while there should “rules that are a little more logical, a little clearer, a little more humane” by him.

Amid the ECB’s increasing pressure on Italian lenders to clean up their balance sheets and tackle troubled loans that are undermining lending, Italian authorities are racing to shore up a financial system burdened by about 360 billion euros ($398 billion) of troubled loans.

For banks not already subject to comprehensive assessment by the European Central Bank, the IMF also urged taking measures such as a systematic assessment of asset quality, more intensive use of out-of-court debt restructuring mechanisms and strengthened supervision.

The IMF said that with growth projected to reach 1.1 percent this year and 1.3 percent in 2017, Italy’s economic recovery “is likely to be prolonged and subject to risks”.

“Risks are tilted to the downside, including from financial market volatility, the refugee surge, and headwinds from the slowdown in global trade. This growth path would imply a return to pre-crisis (2007) output levels only by the mid-2020s and a widening of Italy’s income gap with the faster growing euro area average” the fund’s statement said.

“Public debt has edged up to close to 133 percent of GDP, a level that limits the fiscal space to respond to shocks,” the IMF said.

The fund said that in coming years debt dynamics are expected to remain vulnerable to shocks and decline only gradually.

With “greater priority to lower and more efficient spending and less distortive taxation, including broadening the tax base and introducing a modern real estate tax,”, the Fund urged authorities to act faster on pro-growth reforms.

(Adapted from Bloomberg)

Categories: Economy & Finance