ROME (MNI) – Recent measures by the European Central Bank, the
European Union and its member governments have quieted concerns of a
“devastating crisis” in the euro area, the Bank of Italy said Monday in
its Financial Stability Report.

Also helping boost financial market confidence are signs of an
economic recovery in the United States and the emerging economies, the
Bank of Italy said.

“In recent months, the interventions of the European Central Bank
and the measures decided at both the European and national levels have
allayed fears of a devastating crisis in the euro area,” the central
bank said. “Along with some signs that demand in the United States and
in the emerging economies is picking up, this has improved conditions in
the financial markets.”

Even so, the Bank of Italy warned of dangers still ahead, citing
weak economic growth, the ongoing sovereign debt crisis, and a
fragmentation of the banking sector and of financial markets in the

“The greatest risk for financial stability in Europe remains the
spiral between slow economic growth, the sovereign debt crisis and the
state of banking systems,” the report said.

“Another threat comes from the segmentation of euro-area banking
and financial markets along national lines, primarily as a result of the
emergence of fears regarding the reversibility of monetary union,” it

At his monthly press conference last Thursday, ECB President Mario
Draghi warned that he saw few signs of economic recovery in the euro
area, despite the easing of financial market conditions. The euro
slumped to a two-month low during the day he made those comments.

Despite the weak economic outlook, which Draghi made clear is
likely to be reflected in the ECB staff’s revised forecasts next month,
the ECB decided to hold its policy refinancing rate steady at 0.75%.
Also on Thursday, German data showed exports in Europe’s largest economy
had fallen at the quickest pace since late 2011, strengthening the
perception of the difficulty faced by the euro region.

The Bank of Italy report said the ECB’s new sovereign debt
purchasing plan, OMT, could offset the risks, though it added that the
plan was conditional on deficit cutting and structural reforms being
pursued by national governments and on the ongoing integration of

With regard to its own country, the Bank of Italy identified
“weakness” in the national real estate market and said it expected house
prices to continue dropping in the coming months.

It said credit quality is suffering from the recession, and that
non-performing loans have increased, led by the construction industry.
Credit supply conditions have grown more restrictive, and Italian banks
are increasing provisions for risky loans.

Last month, the Italian government sharply slashed its economic
forecasts to predict a 2.4% contraction this year, double the 1.2% drop
it had projected in April.

The economy is expected to continue shrinking by 0.2% next year,
according to the same revised document. The government cited a broader
deterioration in the Eurozone’s financial and macroeconomic outlook as
the main reason for the growth downgrade.

Even so, Italy is benefitting from a decline in its sovereign yield
spreads compared to Germany’s Bunds, and foreign investors are starting
to buy Italian debt again, the Bank of Italy said.

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