ECB’s Visco Charts Italian Compromise on Europe’s Debt Conundrum

(Bloomberg) --

Bank of Italy Governor Ignazio Visco on Wednesday sketched out a possible compromise that could help complete a long-delayed drive to shore up the European Union’s financial system.

Visco signaled his willingness to agree to limits on how much sovereign debt banks can hold without provisions -- something that Italy, with Europe’s largest debt burden, has so far refused to consider -- if the EU introduces a common safe asset, which Germany has opposed for years.

The opening comes a month after German Finance Minister Olaf Scholz made clear he wants to move forward with long-delayed negotiations. Since that time, however, momentum has been faltering. Scholz lost a bid to lead his Socialist party, while minor changes to the continent’s bailout fund face possible delays after the issue became a political hot potato in Italy.

Speaking in the Italian parliament, Visco made clear that he supports reforming the bailout fund, the European Stability Mechanism. Italian politicians seized upon some of his comments last month to justify their opposition to a new ESM treaty, claiming it would endanger the country’s financial stability by raising the possibility that sovereign debt could one day be restructured.

A “common sovereign debt security” is needed to create a true single market for capital in the region, Visco said in parliament. That type of safe asset could partially replace national bonds on banks’ balance sheets.

Strings Attached

Concentration limits on sovereign bonds held by banks “could be taken into consideration, but only if, at the same time, the euro area decides to introduce a common safe asset,” Visco said. “In its absence, the process of diversification of bank portfolios could not, among other things, take place in an orderly manner.”

Visco’s opening did come with significant caveats. The limits on banks’ holding should not make distinctions between sovereign issuers and should only come into force above a certain threshold, he said.

The European Commission has tried to address the lack of a safe asset through a proposal to bundle existing government bonds and sell them in tranches, but the idea hasn’t gained traction, partly due to opposition from Germany, which is traditionally opposed to any measures resembling debt mutualization. Market participants including public debt managers from across the EU have also expressed doubts the plan could work.

Italy’s initial response to the Scholz proposal, which envisaged limits to sovereign holdings as a precondition to concluding a plan for joint insurance of bank deposits, had been negative. Finance Minister Roberto Gualtieri said in parliament that the creation of a security backed by all euro-area members is needed before introducing limits to debt holdings.

To contact the reporters on this story: Alessandro Speciale in Rome at aspeciale@bloomberg.net;Alexander Weber in Brussels at aweber45@bloomberg.net

To contact the editors responsible for this story: Chad Thomas at cthomas16@bloomberg.net, Jerrold Colten, Nikos Chrysoloras

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