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IMF calls for additional measures on NPLs worth 21% of Italian GDP

IMF calls for additional measures on NPLs worth 21% of Italian GDP

MILAN: Low productivity and investment levels are the challenges that the Italian economy has to face to consolidate growth which in the current state is still moderate and furthermore sustained by expansive monetary policy, low commodity prices and economic reforms, the International Monetary Fund (IMF) said in a report published yesterday.

The annual analysis on the Italian economy, which came at the end of a visit of its economists to Italy, found that progress had been made on safeguarding financial stability. However, “additional measures” are needed to strengthen the operative efficiency of banks and to “notably” reduce non-performing loans (NPLs). Also because “financial fragilities remain significant.”

The directors of the IMF board underlined that strategies for the restructuring and reduction of NPLs of banks should be “ambitious and credible” and supported by assessments by supervisory authorities on the capacity of the banks to resolve the questions of NPLs in a realistic and quick way. It said NPLs have shrunk “marginally” but that “at about 21% of GDP they are among the highest in the EU.”

Based on IMF calculations, gross NPLs have shrunk from €360 billion at the end of 2015 to €349 billion at the end of 2016: in the same time period, the percentage of NPLs compared to total loans has fallen from 18.1% to 17.3% and provisions for NPLs have improved to over 50% while new NPL formation has returned to pre-crisis levels. Bad loans, denoting loans to insolvent borrowers, “remained high at about €203 billion in April 2017 despite bad loan sales of about €8 billion.”

The IMF underlined that on average Italians still earn less than two decades ago. Italian incomes fell during the crisis and have not recovered ground compared to the growth of key countries in the euro zone. The Washington institute foresees that almost a decade could be needed for their return to 2007 levels.

The fund expects the recovery to continue, even if factors exist that could slow it, and they are not minor. It sees the Italian economy growing by 1.3% this year and about 1% in the 2018-2020 period.

One of the issues highlighted by the IMF is the competitiveness gap with European partners that still has not been overcome. Direct experts of IMF Managing Director Christine Lagarde recommend a reform of the system of income negotiation. And they affirm that with the help of their models, a move from a system of trade-union based salary negotiation at the national level to a system of company-based negotiation could lead to a 3.5% reduction in unemployment, and a 4% rise in the employment rate and a competitiveness gain, in the medium term, equal to about 2.5%.