Bank of Italy Says Risks to Financial Stability Have Decreased

Alessandra Migliaccio
·2 min read
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(Bloomberg) -- Risks to financial stability in Italy remain significant but have decreased thanks to a healthier banking system, the country’s central bank said.

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The Bank of Italy added that the government of Prime Minister Giorgia Meloni must focus on fiscal prudence and reforms aimed at promoting growth.

“Although the macroeconomic context remains uncertain, the conditions of the banking system have improved and the level of private debt remains low,” the institution said in its latest report. Still, high public debt and “fears of a return to structurally low growth weigh on the outlook.”

Meloni is grappling with an economy seen growing just 0.7% this year and debt stuck at a whopping 140% of output, according to the latest central bank forecasts. And yet she needs to finance promises to voters including tax cuts and aid to lower-income families, while continuing to bring down the country’s deficit in line with European Union rules.

The report showed that “while quality of credit has worsened due to high interest rates, risks related to families remain limited as financial wealth has grown and the ratio between debt and disposable income has fallen.”

Companies on the other hand are suffering from slower economic activity, high rates and a reduction in credit, it said.

“Debt servicing capacity remains good, but the increase in the cost of financing could impact the rate of loan deterioration,” the central bank said.

In the banking system, the main risks are related to weak growth prospects and high interest rates, according to the institution.

“Profitability increased, but will be affected in the future by the higher cost of funding and a higher rate of deterioration of loans,” the Bank of Italy said.

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