WHEN: FIRST ON CNBC, today Monday 9th January
Following are highlights of the unofficial transcript of a First On CNBC Interview with Italian Finance Minister, Pier Carlo Padoan
All references must be sourced to a 'First on CNBC Interview'.
Steve Sedgwick (SS): What's a nice man like you doing in a fight with Mr. Varoufakis?
Pier Carlo Padoan (PCP): No fight with Yanis Varoufakis. We have an excellent relationship. There was some misunderstanding which was clarified.
SS: The misunderstanding goes on towards him saying it's a house of cards in the Eurozone, there will be collapses elsewhere if Greece were to fall, including criticism about the Italian debt level… saying it's unsustainable for Mr. Varoufakis. How do you respond?
PCP: First of all Italian debt is fully sustainable and getting even stronger going forward. This is a fact. Second, there is no house of cards in Europe, there is a very strong willness to have joint decisions and we will listen to proposals of the Greek government coming forward in the next Eurogroup meeting. And we will all agree, I'm convinced, on a good solution that is good for Greece and good for Europe.
SS: When we've all come through this crisis to this point, and contagion and sentiment among investors is so key. Do you feel those comments from Mr. Varoufakis are irresponsible? Or just misplaced?
PCP: I had the occasion to talk to, more than once, to Mr. Varoufakis, since he took office, and I understand the new government with a strong agenda also needs to find a common language, with the Europeans. We are all in favour of finding together a solution, beyond the language.
SS: Why do you think then, that they are singling out Italy, sir, saying that Italy's 2 trillion Euro debt load is unsustainable?
PCP: Italy has a large debt. But this debt is getting more sustainable going forward. This is justified even by recent estimates from the European Commission. And it's getting stronger because there is going to be more growth. And structural reform efforts will intensify. And also, things like the pension system in Italy are among the strongest in Europe.
SS: Do you feel though, that there is concern that Italy's 10 year paper across the board has gone as low as it can and actually there could be concern about contagion from Greece. You're at 1.65% today as we speak having come down from… you and I remember the days… of 7 percent on Italian 10 years. Do you fear contagion?
PCP: Absolutely not. The fundamentals are strong. And if there is contagion anywhere in a situation of financial crisis, then appropriate measures on the source of contagion can be taken.
SS: Finally on the Greece issue, how do you see this resolving itself? Italy's been pretty pragmatic, I suggest. You have Mr. Schaeuble on one side, Mr. Tsipras and Mr. Varoufakis on the other side, do you see Greece getting some form of restructuring?
PCP: I think that Greece has.. the ultimate need that Greece is facing, is to have a very strong credible structural reform programme that makes growth sustainable. Once we have growth, then the debt problem comes… solves itself. This is the approach we should follow.
SS: Ok. Let's talk about Italy sir. That's what you're here to talk about. You've upped your growth decimals, or the Bank of Italy is looking at upping growth decimals. I think it's up 0.5 percent this year, possibly 1.5 percent in 2016. Is growth finally coming back to Italy after having been lost in the last 8 years?
PCP: Well we've had three years of recession as you know. And we should get positive growth this year. Precise numbers we will see, I am not excluding positive surprises going forward. But there is an important window of opportunity. The macro environment is improving with the oil price going down, with the euro being weaker, with QE of course… which will bring a bit more inflation. This is the time to accelerate structural reforms because structural reforms in a more favourable environment produce stronger results, more visible results and therefore, more support for the reform efforts.
SS: Do you have concerns about the structural reform programme for Italy? Forza Italia says that the Nazarene pact is over because there was a lack of consultation over the choice that Mr. Renzi for the President as well without the backing of broader Italian Parliamentary system. Do you feel the reform programme will get stuck in the mud somehow…
PCP: Well, the so-called Nazarene Pact has to do with institutional reforms and electoral law, which the government is confident can be voted through, even without specific parties supporting it. But the other richer economic structural reform agenda… the labour market… the banking sector, which is a brand new reform we've just introduced. Fiscal reform, civil justice… they're on their way in terms of implementation.
SS: You talked about banking reforms. In terms of the cooperative banking reform, you mentioned as well. But I want to ask you, is there going to be an Italian bad bank? I think we're talking about bad loans somewhere in the region of 180 billiion euros as well. Are you going to set up an Italian bad bank?
PCP: We are going to set up instruments, as market friendly as possible, to deal with NPLs which have accumulated in the banking system because of the prolonged recession, in spite of which the banking system has proved a lot resilience. So we will have to deal with those, and we are working in close contact with the European Banking Services to identify the best solution.
SS: Sir, will that bad bank be taken off the private bank's balance sheet and put on to the state's balance sheet then?
PCP: As I said, we are thinking about different options. And the principle is to use as much as possible market instruments.
SS: Sir you mentioned quantitative easing, you said earlier that you think it could create some form of inflation as well. Given the fact that we will have a very low oil price in Europe as well, will it be overwhelmed by the deflationary pressures?
PCP: No, I think that now, the ECB stance has changed dramatically, and in the positive direction in terms of not just how much, but how, to introduce quantitative easing in the euro area. This, I am referring to the fact that this is an 18 month programme which could be open-ended if need be. So this resembled the initial QE model used by the FED, which proved to be successful. Of course Europe is different. But I am confident that we will go back to normal inflation in reasonable time.
SS: But we've had the benefits of QE already. We have the lower euro, the low sovereign rate, 1.65 for the Italian paper, down from 7%… have we already had the benefits… or do you think actually it's still to come?
PCP: These benefits are market anticipations. They are welcome of course they are benefits vis a vis what the market assess being the US monetary policy stance. So that determines the exchange rate. They are not exhausted. They were build into the system and they will finally defeat the risk of deflationary expectations becoming entrenched in households and companies.
SS: Finally, the criticism is that Mr. Renzi's reforms are going to run out of impetus as well. But away from the financial side, the political side, the institutional labour side… your response, I guess is pretty predictable.
PCP: I don't see any lack of steam in my boss' energy and the government's energy towards structural reforms.
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