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Italy’s bank fund and bankruptcy reforms decisive to relaunch its banks, says Economy Minister Padoan

by Alessandro Graziani and Giorgio Santilli

“The measures taken by investment fund Atlante and the bankruptcy law reform to be made by the government will be crucial for the revival of the banking system.” Economy Minister Pier Carlo Padoan does not seemed worried by the doubts that emerged yesterday among investors ( “in the past few days, perhaps there had been too much enthusiasm”).

The plan “is an approach favored by the ECB’s banking supervision,” he while Padoan sees “no risk” that the EU could stop object to the fund, since it is made up of private capital.

In the first interview of 2016, Padoan talks to Sole 24 Ore-ItalyEurope24 about the 2017 budget blueprint: for privatizations, the MEF is considering selling another tranche of post office and financial services group Poste Italiane.

SOLE: To tackle the fragility of part of the banking system, the government and the private financial sector have prepared a package of measures. How did you get to this decision?

PADOAN: It's an operation that involves the private sector, a solution accompanied by new measures that the government will approve in a cabinet meeting next week to accelerate the bankruptcy and resolution procedures.

SOLE: Which role did the government, and in particular the Ministry of the Economy, have in the creation of the Atlante fund, to be backed by €5-6 billion in private capital?

PADOAN: The Economy Ministry and the government have played the role of facilitators, I would say. The fund will be managed by a private investment management company (SGR) and will be backed by private capital, exclusively on a voluntary basis. It will have two goals: contributing to the recapitalization of some banks, serving as a backstop and last-resort safety net, and launch a mechanism to purchase and manage non-performing loans which, like market operators in the sector do, also uses a leverage effect, increasing its impact compared to capital invested.

SOLE: On the stock market, after two days of euphoria, yesterday doubts emerged from investors. Do you think that the double action plan will work?

PADOAN: There was big euphoria in the past days, perhaps even too much for only two sessions.

The markets do not have a complete picture yet, considering that the creation of the fund has just been announced, and lack of information translates into nervousness. Moreover, the markets will want to look not only into the fund but also in the government's new measures, which I consider decisive to address definitely the problem of non-performing loans. The new measures will complement the reforms already implemented by the government. It's an important step that fills Italy's gap with other European countries.

SOLE: How much does the problem of non-performing loans affect banks' capacity to issue credit?

PADOAN: I am the first to acknowledge that the vulnerability of the system due to the high level of NPLs is a problem that needs to be addressed. The government already intervened in the past months with a series of measures and the next will be decisive. We are working with Justice Minister Andrea Orlando to push forward through emergency legislation with some measures included in the bankruptcy legislation under review by the Parliament. If the length of legal disputes is more than halved, the market value of NPLs will benefit from it. Once the problem of NPLs is resolved, loans to the real economy will resume.

I would add that the removal of part of NPLs from banks' balance sheets will boost the effect on Italy of the European Central Bank's monetary policy.

SOLE: Is this a problem that needed to be addressed early?

PADOAN: Other countries, including Spain, did it years ago with public funds. Since August 1, 2013, European rules prevent us to do so.

SOLE: Speaking of rules, is there a risk that the plan of the Atlante fund is rejected
by the European Commission and the ECB's supervision?

PADOAN: I don't see any risk. From a point of view of competition rules, no state aid can be found, considering that this is an entirely private operation: a private SGR which creates a fund with private capital on a voluntary basis. Fruitful talks are already ongoing between the ECB and the Bank of Italy, and we have seen a very constructive approach in Frankfurt. I believe that they see this initiative positively.

SOLE: How will you replace in 2016 the revenues that were expected from the privatization of state railways company Ferrovie dello Stato?

PADOAN: There are still margins for sale, also for Poste Italiane. Shareholder control can be preserved with a smaller stake, like in the case of Eni and Enel.

SOLE: Are you considering placing on the market further shares of Poste Italiane?

PADOAN: It's a possibility, but always by keeping control.

SOLE: Are you confident that the European Commission will approve of the 2017 budget blueprint, or Document of Economy and Finance (DEF)?

PADOAN: I don't think there will problems. The DEF does not land on the commission's table by chance, but, as I said, we have talked about it, accepting some suggestions. The Italian position is that the macroeconomic scenario in the DEF is absolutely compatible with European rules.

The postponement of the balanced budget target is in line with the worsened international scenario. And fiscal adjustment is linked to how the structurally balanced budget is calculated, a technical issue but with heavy political and social implications.