Avvenire, 17.07.

2011

Were on the Titanic but well avoid the iceberg

BY MARCO GIRARDO
We are travelling on the Titanic in the sense that, if we sink, we all sink, but we can still miss the iceberg. Corrado Passera, CEO of Intesa Sanpaolo, the leading bank in Italy and among the European lending giants, (partially) takes his cue from the metaphor used by the Minister of the Economy, Giulio Tremonti. And sends out a reassuring message to the country and the markets. Italy will make. Provided that it manages to relaunch growth". The approval of the measure in record time is only a first step. "We have at least partly dealt with the rigidity chapter, now we have to add a great deal of energy to the chapter on development. This is a common responsibility of the entire governing class: if we can implement those reforms and interventions which combine rigidity with growth, our country has the numbers to perform better than many others. We met the banker as he was waiting for the results of the stress tests on European banks, including five Italian systemic banks. Passera shows up to our meeting exuding calm, like a sailor who has seen a lot of storms on the markets and knows that this will not be the last. During the latest financial crisis, Italian banks were not bailed out as in several other countries. And they have passed all the latest stress tests. So, why has there been such a violent attack of speculation on the credit segment of the Milan Stock Exchange? Lets start with the facts. Italian banks got through the crisis on their own, without aid. And they have prepared for possible future crises through share capital increases set up in advance. But in the last few days, they have been subject to an external event: the bad management of the Greek crisis at European level. Here is where we must start in order to understand whats going on. The lack of a definitive decision on Greece fed the uncertainty of the markets. However, Italian debt also ended up under attack, with the thermometer measuring spreads between Italian BTPs and German Bund with a high fever. After Greece, which is an unresolved case, the concerns over a default spread to Ireland and Portugal. And, lastly, they reached countries considered sustainable such as Spain and then Italy. If we are unable to stop the crisis an operation which is absolutely within the means of an effectively united Europe no country will be able to consider itself safe. In this sense, the cost of saving Greece is much lower than that which we will all pay if Greece sinks.

Avvenire, 17.07.2011 But we have the greatest public debt in Europe, the third-largest in the world... So far we have always been able to manage it, and if we look at our recent management, we are among the few countries that have not recorded a primary deficit. So, what are the markets afraid of? What are the speculators betting will fail? I dont think that anyone fears that Italy will soon become insolvent. However, many are beginning to fear that our country may not be able to meet its commitments if the growth rate continues to be as low as it has been in the last few years. On Thursday a new extraordinary European summit will be held to attempt to block the risk of contagion. If Europe manages to suitably respond, the crisis will be stopped. Careful though: there hasnt been significant speculation so far. But the situation on the markets could deteriorate if the heads of European governments are unable to handle it or, even worse, decide to apply the Lehman treatment to Greece. Are you satisfied that Italy passed the stress tests? If the safety threshold of Tier 1 Capital is 5%, Intesa has attained almost 9% (8.9%, Ed.) We are also among the few European banks which are already in line with the liquidity requirements of Basel 3 for 2018-2019. This is also a contribution to the solidity of our country. For the President of the ABI (Italian Banker's Association), Giuseppe Mussari, the traditional bank model is penalised by the combined provisions of international regulations and national rules. He is referring to the Basel 3 rules, which would attenuate but not modify the advantages and greater profitability for persons investing in structured securities in relation to persons financing companies. Basel 3 is going in the right direction by demanding stricter capital and liquidity requirements to fight off crisis scenarios such as those which provoked the last global financial collapse. But it should effectively guarantee a greater regulatory premium to lending to the real economy with respect to pure trading. However, the tax rules are even more penalising for those who carry out banking activities instead of those who do pure finance. Then if we add that in Italy, taxes are 10-20 points higher than in other European countries, this certainly doesnt help, and makes competition uneven. This distortion should be corrected. Intesa Sanpaolo never stopped lending to households, small, medium-sized and large companies, even at the most difficult times of the crisis, as

Avvenire, 17.07.2011 testified by the data on loans. Now your Plan envisages 50 billion in credit in 3 years: if it were more difficult to find funding from the markets, specifically because of the public debt issue, would you still be able to maintain this commitment? I think that it is possible to overcome this moment and the crisis. Therefore, I confirm our plan. Certainly, the Italy risk is an additional cost only partly planned for and, we hope, a temporary one. Thats why its right to refer to the risks linked to this situation. But the Titanic can still miss the iceberg. Many small businesses, however, continue to complain that the taps of credit have been closed, and their companies are risking bankruptcy The crisis was also caused by lending without paying attention to risks in the UK and the US. It therefore reminded us that sometimes you have to say no and that it is a responsibility of banks to do so. Fortunately, in our case, the nos did not reach double digits in terms of percentage. Even in the worst phases of the crisis we continued to dialogue with businesses and their associations throughout Italy and we created solutions together, including never-before-seen solutions, in order to weather the storm. And together, we managed it. We currently have 60 billion in loans granted and not used. But recently, I have seen growth in demand, especially in export districts. Many analysts have identified a weakness in the low profitability of Italian banks. But Lehmans profitability was in the double figures... One of the lessons from the crisis is that banks that set off fireworks during boom times are the first to collapse when the wind turns. Then, if you choose to be a bank that works with the real economy, you have to follow its evolution. In any case, our profitability is sustainable, meaning it is combined with low risk and leverage and strong liquidity and soundness. Will approving the budgetary measure in record time be enough to reassure the markets? The demonstration that Italy is confirming its commitment to attain a balanced budget by 2014 provides significant value in the short-term. The fact that we were able to approve the measure in record time is excellent proof of sharing and responsibility. But it wont be enough to convince the markets. Only growth will convince the markets and, above all, will allow us to resolve the most urgent, high-priority social issue: unemployment. Our unemployment rate is, in some ways, lower than the European average. Yes, but if we add the never previously employed, those suspended from work, false self-employed, those stuck at university and the underemployed, which includes many

Avvenire, 17.07.2011 temporarily employed workers we realize that difficulties which are accruing in Italy are much larger and much more dangerous than that shown by statistics. This is a problem that concerns many other European countries. I hope that there are statesmen and politicians capable of making people understand that at this time there is much more at stake than Greeces accounts. Some are saying that the Monetary Union itself is at risk. I dont think that the Euro will implode, though it would please those who do not want to see a strong, financially and politically united Europe. The Monetary Union is a done deal: we have to complete the institutions and decision-making mechanisms functional to the single currency. Starting with the knowledge that we have to harmonise not only monetary policy, but also policies for growth. In this sense, the adoption of the European half-year is a good exercise: not only referring to account balances, but also medium/long-term economic policy. Account keeping has been covered, but the growth chapter for Italy has been postponed: is it possible to talk about tax reform? The measure contains several interventions for growth and opens up another two issues: tax reform and revision of spending. But to convince the markets, we now need to present an organic plan for growth based on widespread consensus. Where would you start, if you could choose? The main driver of growth is employment, and companies are the driver of employment. Significant tax premiums for those who invest, grow and create good employment. Some of this is in the measure, but its not enough. To finish the job? All growth drivers must be aligned and accelerated. To increase the productivity of the system we need to relaunch infrastructures, for example. Investments are at minimum levels while delays compared to our European competitors exceed 200 billion. Effectively, in many countries the crisis has restored Keynesian deficit spending economics to their former glory. But at the same time, we cannot let up on the strings of our public purse As regards infrastructures, its not only public spending: many works can be selffinanced at least in part; private companies are now ready to do their part; there are European funds not being used; there is a lot of waste and useless works. Has the crisis demonstrated the limits of market economics and liberalism? It certainly demonstrated that markets without rules do not work. On one hand, more market economics are needed in some sectors. And many areas of Italy are still closed. For example, local public services. On the other hand, we have learned that the market is not everything. There are sectors, such as healthcare, where the role of

Avvenire, 17.07.2011 the state, if managed well, is irreplaceable. Not only that: the crisis also showed that welfare must increasingly involve the non-profit sector, social enterprise, the economy of charity. Which does not meet privatistic utility criteria nor primarily public criteria. Taking a good look, from the fog of the crisis, a richer society has emerged: with more Government, more market and more social economy. And each of us can find their place better than in the past. However, the events of the global crisis seem to indicate a more profound upheaval: if up to a few years ago, the economy was the structure and finance was a superstructure, these parts seem to have been reversed, with the economy depending on finance I dont see any paradigm shifts. Also because there are many models of capitalism and many models of society which can be combined. Turbo-capitalism based on finance certainly demonstrated its limits. We all have to work together to create more responsible capitalism within stronger democracies. International organisations, starting with the FSB, are specifically attempting to find new rules to improve financial market operations: will this be enough to avoid new crises? Important steps have certainly been taken in terms of regulation, which now must be concretely and uniformly applied in the various parts of the world. Some significant regulatory issues still have to be dealt with, such as the world of derivatives and the world of shadow banking, meaning, specifically, the unregulated areas. All of this being said, and without detracting from the importance of rules and control, we must never forget that nothing can replace the sense of responsibility which each of us must demonstrate in doing our jobs. hot issues DEBT Italian public debt is growing by leaps and bounds, and in May it neared 1900 billion, standing at 1,897.4 billion, according to the data from the Bank of Italys bulletin. This is a new all-time record, and means that each Italian is in the red by 31,500. The figure has increased by 2.9% since January and, given that growth is moving at lower levels (+ 1% in the two-year period 2011-2012) this will also affect the debt/GDP ratio, which Italy is aiming to reduce starting from next year. THE BUDGETARY MEASURE Today the provisions of the 47.9 billion measure enter into force. The law was published in the Official Journal yesterday: thus, the increases in stamp duty for

Avvenire, 17.07.2011 securities deposits, new healthcare co-payments, increases in the tax on vehicles with power greater than 225 Kw, increase in the taxable base of stock options and the increase in IRAP for government concessionaires take effect from today. The crunch on pensions will start in August, while cuts in tax bonuses will take effect from 2013. BANKS Italian banks easily passed the European stress tests: none of the 5 banks are in the grey area of banks which have Tier 1 Capital just above the 5% threshold, and which own securities of countries most at risk. No problem for Intesa Sanpaolo, MPS, UBI, Banco Popolare or Unicredit, the only bank which did not implement a share capital increase. Italian banks have passed, and are sound. commented the President of the ABI, Giuseppe Mussari. EUROPE The next event is set for Thursday the 21st, when the leaders of the 17 countries in the Eurozone will meet to attempt to overcome the deadlock regarding aid to Greece. "The agenda, explained the President of the European Council Van Rompuy, contains financial stability of the Eurozone and the methods for funding the next programme for Greece". The worker bees are working on a draft agreement which could even win over Germany.