Transcripts of a Conference Call on the IMF’s 2016 Article IV consultation with Italy
Rishi Goyal, Mission Chief for Italy, European Department
Andreas Adriano, Senior Press Officer, Communications Department
MR. ADRIANO: Good morning to all, good afternoon to those in Europe. My name is Andreas Adriano, I'm with the IMF Communications Department. And this is our Conference Call to present the Staff Report, and other documents for the 2016 Article IV Consultation with Italy.
Let me just go over the ground rules. This call is on the record, but embargoed with the same embargo of the documents that you have received through the IMF Press Center. That means all the content printed and spoken is embargoed until 6:00 p.m. today, Washington Time. That’s midnight Monday to Tuesday in Central Europe, in Italy. And that’s when you can publish the documents. With that let me turn it to the IMF Mission Chief for Italy, Rishi Goyal, who will make some opening remarks, and then we will be ready to take your questions.
MR. GOYAL: Thank you, Andreas. Good morning, everyone. Good afternoon to colleagues and friends in Europe. We issued a lot of material that I'm sure you have in front of you. The Staff Report, some selected issues papers, and a couple of working papers. Let me call your attention in the Staff Report bundle to a supplement that we issued to the Board. The Staff Report itself and all of this material was issued prior to the Brexit vote, so a lot of the numbers that you see in there predate the Brexit vote, and that includes the growth projections.
In a supplement that we issued to the Staff Report, it's roughly page 70 of the bundle, you will see that we are revising down our growth projections, growth for this year will likely be somewhat below 1 percent, and for next year, 2017, it will be about 1 percent, with downside risks having increased somewhat.
Our precise numbers will come out next week, in the context of the July World Economic Outlook publication, and so this will be as part of the entire multilateral surveillance that we will be doing. Our sense from the growth is just that it isn't an issue so much of directly linkages with the U.K., which are relatively limited both on the trade side and on financial sector exposures, but more generally the heightened volatility in the financial markets, and the higher general uncertainty is likely to weigh on investment and growth going forward. Just to repeat. Again, for 2016 we are now looking at growth that is just under 1 percent, and for 2017 around 1 percent.
I'm sure you have a number of questions on the financial sector, so we'll wait for that, but let me more broadly make the point that the Italian economy and financial sector face a number of complex challenges. This relates to a recovery that is, on the whole, rather modest and fragile, against the backdrop of long-standing structural rigidities, strained bank balance sheets, and high public debt, which leaves very little room to cope with shocks.
The good news is that the authorities are fully on top of this. They have been undertaking a very important set of reforms in a number of different areas, which we have outlined in detail in the Staff Report.
Our sense is that now is a good time to deepen these reforms and to broaden them in a manner that will lead to a mutually-reinforcing package. Structural reforms that can boost growth in the near term, pro-growth fiscal measures that can also contribute to boosting growth in the near term, thus creating space for moving somewhat more forcefully on accelerating the cleanup of bank balance sheets; as well as for building fiscal buffers that can make the recovery more robust, can make it -- can provide more instruments or space to be able to cope with adverse shocks.
On the financial sector, our sense is that there are a number of measures that the authorities have taken, important insolvency reforms that have been passed, the framework on bank consolidation; these need to move forward in terms of full implementation. They will yield the benefits over time. Moving forward in terms of strengthening supervision, in terms of ensuring that banks are able to reduce their NPLs over the medium term quite sizably; more intensive use of out-of-court debt restructuring mechanisms, all of these will be helpful and put in place the fundamental measures that are needed to put banks on a sounder footing where they can also support the economic recovery.
On fiscal policy the authorities have pursued a prudent course. They have been delivering important primary surpluses. This is good. We all know about the flexibility that is being deployed for this year. Our advice is that going forward, so 2017 to 2019, it would be prudent to have evenly-faced fiscal adjustment net of any remaining upfront costs of structural reforms. And of course if downside risks materialize, then automatic stabilizers would be expected to work.
So, again, complex challenges, a relatively difficult outlook. The good news is that the authorities are, again, very much on top of issues, both in the financial sector, but more broadly we are moving forward with a good set of reforms. We think these should be deepened and broadened to yield the best dividends going forward. Let's take your questions. Thank you.
MR. ADRIANO: Thank you, Rishi. Before starting the questions let me just remind you that the World Economic Outlook, that Rishi mentioned, will be published next week on July 19. Media Relations Division will inform you accordingly.
QUESTIONER: Thanks for doing this. According to IMF's executive board Article IV consultation with Italy, the adoption of bail-in requirements, that was the BRRD framework in Italian banks should be dealt with appropriately after the Brexit. Can you let us know what is proper for the IMF Board? For example, do you think it will be appropriate for Italy to invoke Article 44 of BRRD [EU Bank Recovery and Resolution Directive] which indicates that under special circumstances, where to the bail-in too it's applied too, the resolution authority may exclude or partially exclude abilities from the application to write on all conventional powers?
In the same context, do you believe that it will be more appropriate for the Italian authorities to use government financial stabilization tools as detailed in Article 56 of BRRD, documenting that the application of the resolution tools would not suffice to avoid the significant adverse effects on the financial system, and would not protect the public interest. Thank you.
MR. GOYAL: Thanks a lot for that. The main message that came out of the Executive Board assessment on this particular point, is that there is adequate flexibility within the existing state aid and BRRD framework to be able to deal with the problems. This is a point that our Managing Director also made a few days ago; and the Italian authorities have been very strong in saying that they are seeking solutions within the existing framework.
So the point here, both in regards to the solutions and mechanisms that they are looking at, as well as in regard to the specific issue of burden-sharing, of bank creditors, is that the framework exists, our understanding is that the framework appears able to handle that, the question is, how best do the authorities and the European institutions discuss what they are doing with regard to seeking the best solutions for this. That’s point number one; the framework appears adequate to be able to cope with these issues.
Second, you know very well that the European Commission, a few days ago, noted that they and the authorities have come to an understanding on what could happen in the event that the situation deteriorates, if financial stability is deemed to be at risk. Within the framework, there is the scope to be able to provide liquidity support as well as temporary precautionary recapitalization support from stress tests. The first part is on the liquidity support, up to EUR150 billion of state guarantees on new bank liabilities until the end of the year. That will provide the ability to deal with this. For banks that require restructuring and burden sharing of bank creditors the issue there is that this is up to the discretion of the authorities and the European Commission in the solutions that they seek on how to deal with this when financial stability is deemed to be at risk.
On your question on the bail-in: There is the flexibility to deal with this when financial stability is deemed at risk. If a bank, on the other hand, is deemed to be nonviable or requires restructuring in the very first instance, then it would be expected within this framework that there would be some amount of burden sharing which will need to be discussed.
QUESTIONER: I just wanted to get back to the earlier point. Do you believe that at this point a government intervention within the existing rule will be warranted and necessary given the situation with Italian banks?
MR. GOYAL: It is one of the options under the existing rules, under the existing framework. We do think that the existing framework does provide the scope to be able to deal with different contingencies. So, again, we are talking about government support in the context of a contingency, if events materialize such that financial stability is deemed at risk.In fact, the authorities have already gone ahead and made some of these plans, as was announced by the European Commission in terms of liquidity support to the banks. On liquidity support, banks actually have a lot of liquidity at the moment. But the point is, in a situation when financial stability is deemed to be at risk, then the liquidity backstop, the temporary state guarantees that would apply from the bank liabilities that would allow them to continue to access liquidity that is relatively cheap.
On the issue of capital which is probably what you were getting at, that of course depends upon the supervisory assessment that would come from an EU-wide stress test, and that relates to the precautionary recapitalization. If you look at whether the banks have capital needs right now, that really is part of the SREP [Supervisory Review and Evaluation] process. As you well know, a lot of the banks have already raised capital with regard to previous SREP processes.
QUESTIONER: Just a quick follow up. Do you believe one of the subjects of debate at the moment, whether in a precautionary recapitalization is whether or not institutional investors would be bailed in? (inaudible) systemic or risks in the system posed by that bail-in (inaudible) in Italian banks?
MR. GOYAL: A lot depends on the situation. One cannot prejudge which way this is likely to go because in the event of financial stress there are, of course, a number of considerations that will need to be taken into account. This, of course, also depends upon the amount of central bank liquidity support that is provided which is, of course, a backstop against an exacerbation of stress.
The other point I would make in this regard is the importance of prudent communication. Prudent communication is what would be essential to anchor expectations and confidence. I do not think this is a black or white issue that if one takes a particular action this will necessarily result in certain outcomes, that you seem to be suggesting. The point, again, is the framework has the flexibility to deal even with those contingencies. If the judgment is made by the authorities and the European institutions, that this is a particular risk factor that they need to take into account,that can be done within the existing framework.
QUESTIONER: Good afternoon and thank you for the teleconference. You mentioned before that this is, of course, between the EU and the Italian authorities, but my question is have the Italian authorities sought any type of assistance or guidance by the IMF, and are you in touch, and on what level with the Italian authorities?
MR. GOYAL: We are in regular contact with the Italian authorities, with our counterparts, and they, of course, have been very gracious and kept us in the loop. Which is why initially I mentioned that the authorities are very much on top of the situation. They fully understand the problems that they face and are drafting solutions. They have announced some measures already, and I’m sure in due course, when the time is right, they will announce what they would like to do.
QUESTIONER: Hello. I’d just like to touch again on a point which was raised earlier, just to make sure we get this right. In the executive board assessment, you say recognizing the option of the BRRD framework, they noted that concerns related to the bailing of return investors should be dealt with appropriately. Just want to know what the appropriately means in a few words?
MR. GOYAL: Appropriately means in the best judgment of the authorities and the European institutions within the context of the existing framework.
QUESTIONER: So it relates not just to Italy, to the Euro Zone as a whole?
MR. GOYAL: This was for the Italy Article IV consultation, and the paragraph was written in regard to the Italy Article IV consultation. But this, indeed, is a general point that would hold for the rest of the Euro Zone membership as well. The point was raised in the context because as you well know, the bank liability structure in Italy has unique characteristics, which is what this is referring to. But the point here is not to signal one way or the other that something should be done or something should not be done. The point here is to signal that the relevant authorities, the various authorities, have the discretion within the existing framework that they can apply under a certain circumstance. Of course, it is up to the judgment at that point to decide a prudent course of action.
QUESTIONER: Hi, everybody. Just to know what is the IMF position with regard to the upcoming constitutional reform in Italy. Do you think that is going to be even more dangerous compared to Brexit in terms of the actions for the financial markets and not only that?
MR. GOYAL: So it is, of course, up to the Italian people how they want to vote on the constitutional reform and what type of electoral system and powers for the Senate, etcetera, that they would like to have. So I do not want to comment anything in that regard.
There are important elements within the constitutional reform that relate to the streamlining of responsibilities, vis-à-vis different levels of government with the aim of streamlining the decision making process which could have benefit. On whether this is likely to exacerbate uncertainty, this is one of the elements that one can see as part of a broader set of issues or factors that are affecting the outlook, or the certainty of the outlook. So which way this is likely to play out, certainly, is a factor in investment decision-making that we would think affects the outlook. This is an important part of the process that needs to go through and we’ll have to see how the outcome comes about.
QUESTIONER: Thank you. Sorry, I missed the part on banks on public support. Do you think that eventually Italian banks will need some public funds to cope with the situation, you know, to fill capital gaps, and under the difficult situation on the financial market? Do you think public support is needed as the European Central Bank (inaudible) said last week?
MR. GOYAL: The first and foremost point is that the banking sector needs restructuring just as a broad sentence, needs restructuring to move to a stronger basis and also become smaller. In this process, yes, some resources may well be needed. The only question is where do these resources necessarily have to come from, and it depends on the situation.
What I had said earlier is that the framework, the state aid, and the BRRD framework have recently been adopted, so they are new and relatively untested. To our understanding, to our knowledge, there is adequate flexibility within them to be able to deal with the situation.
In cases where financial stress or financial stability is deemed to be at risk, there are a number of options that can be deployed to ensure financial stability. This includes the issues of precautionary recapitalization. That’s where one of your points about state aid, or resources for the banks, comes in. There is a separate issue related to when a bank has to go through resolution. When there are troubles that needs to be addressed, how does the framework address that, and that would normally be expected to carry some sort of burden sharing. But again, the point is when financial stability is deemed to be at risk, there is flexibility, there is scope to be able to take that into account in the solutions that are drafted.
QUESTIONER: Hello. Just going back to the constitutional referendum again. Do you think it’s possible to make forecasts on the impacts of GDP growth with regard to one outcome or another outcome in that reform?
MR. GOYAL: I don’t think that would give a true... Let me put it another way: There would be too much false sense of precision in trying to do that type of exercise. What we can say is that in the context of a range of reforms, in our comprehensive package of reforms, we have looked into this. In fact, that Italian authorities have detailed projections on this as well, in the context of a comprehensive package of reforms that gets at various structural rigidities in the economy, that improves decision making, makes it faster, more transparent, makes the general environment more friendly towards business and investment.
You can see that markups on prices are likely to come down. Wages are likely to become closer to what labor productivity is. That, itself, is going to generate a fairly notable boost to growth. The reduction in markups,the improvement in investment environment,this should facilitate investment, because in Italy investment has declined very, very notably. That type of reallocation of resources can yield substantial growth dividends in both the near and the medium term. But on a very specific point about the constitutional referendum I think it would require too much faith in one’s ability to do that. I wouldn’t go down that road.
MR. ANDRIANO: If there are no more questions, we will bring this conference call to an end. Let me just remind you again that this call was on-the-record, but embargoed until today, 6:00 p.m. Washington time, or midnight Italy time, and there will be replay information that will be provided at the end.
If you have any questions please write to us at the IMF, email@example.com or many of you have my contact, and we will be happy to clarify any doubts. Just to remind you once again, the World Economic Outlook update with our global and regional growth forecasts will be released on July 19. With that, we’ll come to an end. Thank you very much for calling and have a good day.