Italy needs banking reform to continue "weak" recovery says OECD

Jasper Jolly
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First High Tide Of Autumn Hits Venice
Banks in the Veneto region are among the latest to need a government bailout (Source: Getty)

Italy must reform its banking system if it is to continue on a “weak” path to recovery, according to the Organisation for Economic Co-operation and Development (OECD).

The country should be prepared to force holders of Italian bank debt to lose money rather than using public funds to bail them out, according to a report by the OECD, a group of the world’s richer nations.

The report said: “If public funds are needed to recapitalise distressed banks, take full advantage of EU regulations, imposing losses on equity and bondholders, and restructuring banks’ operations.”

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The Italian government has been unwilling to impose losses on bondholders, with large numbers of domestic retail creditors making such a move risky to electoral prospects. The OECD report suggests the government could compensate retail bondholders for their losses.

Italian banks have had the shadow of a large stock of non-performing loans (NPLs) hanging over their balance sheets since the financial crisis, when they were revealed to be vastly overextended.

NPLs are debts that have not been serviced for at least 90 days. In practice many of these loans will never be paid back, forcing banks such as Monte dei Paschi di Siena and Banco Popolare di Vicenza into a succession of bailouts by the government.

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The OECD predicts growth to rise marginally to one per cent per year in 2017 and 2018, judging the Italian government’s fiscal policy to be “appropriate” to reducing its budget deficit.

However, the group notes cuts to infrastructure spending may harm future productivity growth.

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