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Draghi said recently that for the AQR the sovereign bonds will be treated as neutral, but that they will be considered as a risky asset for the stress test. What could it mean for Italian banks?
"I can't comment on this, as even the parameter have not been decided, yet and the stress test will be a joint exercise with the European Banking Authority (EBA). What I can say is that, in general, banks have to manage their risks. The stress test by definition stresses the entire portfolio of the banks, thus including sovereign debt".
Don't you think that the OMT should also change your perspective, when you judge government bonds detained by banks?
"I would not link the two things. The OMT has obviously had a consequence on the pricing of sovereign bonds, to the extent that it has removed from the spread that certain governments have to pay the compensation for the probability that a "catastrophic risk" scenario may materialise: the probability that they may leave the euro area. Stress tests are never made for dealing with "end-of-the world" scenarios, but with plausible events, as adverse as they can be".
The ECB mentioned the possibility of a conditioned LTRO, "British style", a "funding for lending" LTRO, but what are you exactly thinking of?
"It is clear that when a central bank provides liquidity to the banking sector, it expects the banking sector to transmit the liquidity stimulus, in volume and in prices, to the economy. But on the other hand you cannot really force the banks to lend to the real economy when there is a problem on the demand side, when the perceived risk that banks attach to a loan is simply too high. You also don't want that the liquidity injections lead the banks to take excessive risks elsewhere. Analysts often mention sovereigns, but I am not thinking only about that. I think, as also Draghi said, that putting "conditions" on LTRO is complicated for all these reasons. For me the essential is to analyse if and how risks are properly priced and managed by banks".
How's the situation in the credit market?
"On lending to the real economy, what in particular needs to be addressed is the issue about the lending to small and medium enterprises. Recently, we have some positive signs in the evolution of lending. The contraction of lending to non-financial corporation has been 2.9% in the 12 months to October. This had been falling consistently, but in the most recent period the flows of new loans, while remaining negative, have shown signs of stabilisation compared to the earlier part of the year. You have also to take into account that bank lending is in some cases only part of the total financing of a company. Large firms for example tend to borrow directly on capital markets, issuing corporate bonds, and this market for corporate bonds have been doing very well in terms of prices and new volumes. We also see that, on their asset side, euro area firms have accumulated more than two trillions in liquid assets, largely reflecting precautionary savings and reluctance to invest. As profits have been falling, distribution of income to the shareholders and owners has been cut. Large size corporations are better placed here than the smaller firms, particularly in countries like Italy"
How can we address this problem?
"In contrast to most other countries in the euro area, in Italy, you have a marked dual industrial structure: on the one hand there are many very small firms, and the other hand a rather small number of large and very large firms. This is important because credit supply constraints are particularly severe for the smallest firms, which are the first to suffer when banks contract lending".
But what would you suggest?
"Italy has taken some measures that have improved the situation, like the moratoria, which make credit conditions a bit easier, but you still have long-standing and severe structural issues to solve. You don't escape the big question: it's a structural problem and Italy has to make economic reforms. During the crisis Italy has done a lot in terms of correcting its fiscal weaknesses, but has not done enough in terms of economic reforms. The labour market, still needs more flexibility. Labour market legislation needs to facilitate - not hinder - the capacity of businesses to deploy their labour force in the most efficient manner. More generally, competitiveness and the attractiveness of a country as a foreign direct investment destination depends on the "easiness to do business", on its bureaucratic environment, on its judicial system's capacity to enforce the rule of law, on the country's governance in general. Without good economic governance solidly in place, you cannot expect foreign investment to return to Italy. If you look at the last "Doing business" index of competitiveness, Italy is again extremely badly placed".
How is the situation in public finances, in your opinion?
"While still increasing, the public debt level is on a better medium term trajectory thanks to reduced annual fiscal deficits . To keep public debt on a sustainable path, it is essential that the government sticks to its fiscal commitments. This means that fiscal efforts cannot be relaxed. For example: to have a debt/gdp ratio of 100% in 2025, you would need, from 2016 on, a primary surplus of about 4.5 per cent of GDP. It is possible, and other countries have kept their primary balances at those levels in the past, but it requires efforts and commitment. In this respect a major achievement is to have put the Fiscal Compact into the Italian constitution. I would also like to stress that the adoption and implementation of structural reforms leading to a path of higher economic growth would make possible a stronger reduction of debt for a given fiscal effort.''
Anti-euro parties are rising. Are you concerned?
"There is a fundamental political question here: do we need more or less Europe? We created an internal market which is working, it was worth creating. But it has become clear that we had too little Europe in crisis management and crisis resolution, to deal in particular with situations where a State is in difficulty. EFSF, ESM and the Banking Union are enormous achievements, in that sense. The new institutional set up is still not complete, but it's going to be completed over time. The crisis became so acute in Europe because we had too little Europe. And now we are addressing some of the major problems we have had to face".