Italy’s Visco Sees No Risk Attached to Using ESM Funds

(Bloomberg) -- Bank of Italy Governor Ignazio Visco said there’s no risk in drawing on the region’s rescue fund to help the economy weather the coronavirus pandemic, though ultimately structural reforms are needed to boost growth.

The Italian government has so far not tapped the 36 billion euros ($41 billion) it’s eligible for under the European Stability Mechanism because of the associated stigma, since such funds typically come with conditions.

While Visco and Finance Minister Roberto Gualtieri have been at pains to explain that during the pandemic such rules would be relaxed, Italy’s populist parties have portrayed it as a sellout that would see the country lose control of its finances.

“These funds, now it is clear, they come without strings attached,” Visco, who also serves on the European Central Bank’s Governing Council, told Bloomberg’s Francine Lacqua. “If needed, I don’t see any risk to use, but we should not consider that this is a manna, this is still a loan, rather than being a loan in the market this is a loan with respect to Europe.”

The coronavirus pandemic, which forced business to close and shut borders, has hit Italy’s economy hard. Output shrank 5.3% in the first quarter, the most since the data series began in the mid-1990s. The second quarter is likely to be worse.

The Bank of Italy’s base scenario is for a 9.2% contraction for the year, with a slump of possibly 13.1% if new containment measures are deemed necessary, Visco said, confirming earlier forecasts.

The Italian government has passed two fiscal stimulus packages worth a total 75 billion euros to support businesses and workers. Measures to lift domestic demand will contribute more than 2 percentage points to GDP, helping to limit the drop, Visco said.

All that spending will cause debt to swell well above 150% of gross domestic product.

Italian Prime Minister Giuseppe Conte told reporters on Wednesday that he couldn’t rule out further urgent spending when asked about the possibility of expanding the deficit.

In the interview on Wednesday, Visco welcomed the EU’s fiscal response to the crisis, and also sought to spur politicians to take steps to boost growth through long-term reforms, which is the only way out of financial difficulties.

“Italy’s big problem is the rate of growth, which is too low,” the governor said. “You need reforms to increase the growth rate of the economy” he said.

While the ECB’s expansionary monetary policy is keeping a lid on the government’s debt service costs, it should not be seen as an obstacle to make the necessary changes, he said.

“Reforms should take place, but it is not because there are purchases of public debt that reforms are lagging behind,” he said.

©2020 Bloomberg L.P.