Visco, Bank of Italy: “Europe and Italy have been in the throes of an exceptionally serious crisis”

Europe and Italy have been in the throes of an exceptionally serious crisis, necessitating financial assistance programmes to aid Eurozone public finances, banking systems and external accounts, said Ignazio Visco, Governor of the Bank of Italy.

Speaking in Rome after a shareholder’s meeting for the first time in his role, Visco acknowledged the crisis faced by the single currency, and said it was being tackled on several fronts.

“The Eurosystem intervened with large-scale extraordinary monetary measures. The authorities of the most exposed countries made substantial corrections to their public finances and prepared structural reforms to foste  growth, interacting with the European authorities,” he said.

In Italy, a raft of measures have been taken since last summer, and supported by the new government of Mario Monti.

Measures adopted in the third quarter of 2011 made a decisive contribution, with yields on government securities decreasing by 220 basis points between the end of December and the middle of March.

Visco added that “tensions on the sovereign debt market have intensified again in the last few weeks, with the spread of new fears about the strength of the growth of the world economy and the possible emergence of a negative spiral between low growth, deteriorating public finances and problems with banking systems.”

Uncertainty about Greece after the general election has further strengthened the tensions and the spread between ten-year BTPs and Bunds is now back above 450 basis points.

“This has been due in part to the fall in German interest rates, which have been driven down by the search for safe haven assets. At the centre of the crisis there are now growing doubts among international investors about governments’ cohesion in guiding the reform of European governance and even their ability to ensure the survival of the monetary union,” he said.

The Bank of Italy said that, according to consensus forecasts, over the next two years as a whole the GDP of the euro area will be negligible. For Italy, 2012 will inevitably be a year of recession, owing to the financial uncertainty and the drastic measures to adjust the public finances.

Meanwhile, the segmentation of the interbank market along national lines became more pronounced, with a sharp rise in the spreads between the overnight rates on the Italian and Spanish markets and the euro-area average.

“Italian banks and those of other countries recorded a substantial reduction in their wholesale fundraising. In the last five months of 2011, the former’s net fundraising from non-residents, on foreign interbank markets and by way of bond issues, shrank by more than €100 bn. Investors feared that a contraction in fundraising, together with a possible lack of eligible collateral for Eurosystem refinancing, could trigger a systemic crisis,” Visco said.

Tensions were intensified by the large volume of bonds maturing on international markets in 2012, amounting to nearly €450bn for the euro area and €75bn
for Italian banks.

The Bank’s balance sheet had total assets of €539bn at the end
of last year, with a 60% increase from the previous year as a consequence
of the monetary policy operations carried out at European level.

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