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Recovery not certain, Draghi warns

Bank of Italy governor says country needs reforms

29 October, 17:47

Tremonti and Draghi

Tremonti and Draghi

(ANSA) - Rome, October 29 - While the global economic free-fall appears to have stopped, it is not for certain that a long-lasting recovery has began, Bank of Italy Governor Mario Draghi said on Thursday.

In an address marking World Savings Day, Draghi explained that a real recovery needed to be ''based on factors other than special economic policy measures'' adopted to deal with the crisis.

Draghi, who is also chairman of the Group of 20's Financial Stability Board (FSB), observed that in regard to the Italian economy, ''the acute phase of the crisis is over and gross domestic product was back on the rise in the third quarter after declining for over a year''.

Nevertheless, he warned, while some factors did appear favorable, others remained critical including the slump in domestic consumer demand.

The employment picture also remained gloomy, he added, with a 3.3% year-on-year drop in people holding jobs in September, a trend expected to continue for the rest of the year.

After this past year's global financial crunch and subsequent economic downturn, Draghi observed, ''nothing will be the same again and all players on financial markets, starting with banks, should accept this fact''.

According to the FSB chairman, ''the market place should not forget that that the crisis was the consequence of its own imprudence''.

New market rules to ensure that a similar situation does not occur again, Draghi said, ''must be introduced gradually in order not to hinder the economic recovery''. Looking at Italian banks, Draghi observed that ''our banking system weathered the crisis better than many others. But we must not let our guard down because the system remains very fragile''.

Evidence of this, the governor added, was the fact that ''the quality of credit continues to deteriorate sharply and the effects of the recession have already cut significantly into bank profits''.

In order to meet the challenges of the future, Draghi said, Italy ''urgently needs to get back on the road to reforms to create the conditions for a greater economic growth, which is the foundation of financial stability''.

''We need to tackle our economy's structural weaknesses in order to foster a lasting recovery, one which is not just based on exports,'' he added.

GOVT TO HELP SMALL BUSINESSES WITH CREDIT, TREMONTI SAYS.

Also marking World Savings Day was Economy Minister Giulio Tremonti who in his address said that the Italian government was examining ways to help small businesses obtain and manage credit once the current one-year moratorium on loan payments expires.

''We are thinking about one or more assistance funds, the structure of which need to be compatible with the market,'' the minister explained.

The moratorium, he added, ''was good but it is not enough''. The Italian Banking Association (ABI) and associations representing small businesses and other enterprises, including farms, signed an accord in August to suspend payments on borrowed capital for one year, although interest on the capital will still have to be paid. The accord also suspended payments on capital included in leasing agreements, for both real estate and non-real estate assets, and extended by 270 days the deadlines for the prepayment of short-term loans. One approach the government may take, Tremonti said, could be adjusting taxation, granting greater deductions, ''because personally I prefer to help businesses directly rather than work through the banks''. ''In any case, there will probably be a combination of approaches'','' he added. In his address, Tremonti also spoke about Italy's pension system which he said ''is one of the most stable in Europe''. This stability was obtained, he explained, ''thanks to the consent of our institutions and a responsible position adopted by the social parties''. Looking at Italy's position in Europe, Tremonti said ''we are on the same level as France and Germany and in a more solid position than Britain, Ireland and Spain. In fact, in many ways we are better off than Germany and France''.

Premier Silvio Berlusconi sent a message to mark World Savings Day in which he said ''the worst part of the financial crisis would appear to be behind us and, while slow, a recovery has begun''. According to Berlusconi, the economic downturn is being overcome ''thanks to the decisions made on a global level as well as the fact that all institutional, social and economic players in this country fulfilled their roles in a positive way''.

photo: Tremonti (L) and Draghi (R)

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