Italian Finance Minister Pier Carlo Padoan is confident that measures implemented by his government to strengthen a fragile banking sector will deliver dividends, based on a declining debt forecast and a number of government reforms.
The country, whose banking system has been embattled with non-performing loans (NPLs) amounting to more than 300 billion euros ($353.8 billion) following a prolonged recession, recently enjoyed an upwardly revised growth forecast of 1.5 percent for 2017 and an upgraded credit rating from ratings agency S&P.
Speaking to CNBC in an interview on Tuesday, he said, "We expect debt to decline aggressively over the near future" because of higher nominal growth.
Asked if he believed the Italian government's policies to reduce NPL numbers were on the right track, Padoan said, "The net stock of bad loans has fallen by as much as 25 percent in 2017, thanks to a mechanism which is beginning to gain momentum and speed, meaning a secondary market for NPLs. These are market driven operations. So the system, which is looking at a very severe financial crisis in the recent past, is now moving towards a more normal configuration, also thanks to measures introduced by the government in terms of accelerating mitigation procedures."
Italy's NPL problem is the product of a drawn-out recession and lengthy credit recovery procedures. The double-dip recession hitting the country between 2008 and 2014 "severely impaired Italian banks' balance sheets and loan quality," according to the Bank of Italy. And despite improved growth forecasts, the IMF predicts the country will not return to pre-crisis levels for another decade.
"What I'm concerned most by is getting rid at the appropriate speed of the NPL new flows but also existing stock," the minister told CNBC.
"So the problem is not whether we should go in different directions — we all want go in the same direction. What has been question(ed) is the speed or the so-called calendar approach as proposed by the SSM (single supervisory mechanism)." The SSM refers to the mechanism granting the European Central Bank (ECB) a supervisory role to monitor the financial stability of banks.
Analysts have expressed concern about the profile of periphery debt — Italian debt in particular — once the ECB begins stepping away from the market. Of late, the ECB has been buying around 50 percent of BTPs, Italy's multi-year treasury bonds. A key question is where marginal demand will come from in place of the ECB.
"The marginal demand is going to come from the investors on account of two reasons," the minister explained.
"First of all, the issuance policy by the treasury of new debt is taking in full consideration the expectation of higher interest rates as we go forward, so that risk has already been internalized, and this should be clearly communicated to the markets."
Secondly, Padoan said he expected debt to decline aggressively over the near future because of higher nominal growth.
"All in all, as we see the auctions that on a regular basis the treasury is managing on the debt market, we see that confidence in the Italian paper by investors remains untouched. And the recent upgrade by a major ratings agency speaks to that."