Bank of Italy urges more public investments, labor tax wedge cut to shore up recovery

Italy needs to revamp public investments and further cut the labor tax wedge to strengthen its moderate recovery, the Bank of Italy's governor said on Tuesday.

"The recovery needs to be sustained... We must, and we can, do more," Governor Ignazio Visco said during an annual report on the state of the Italian economy.

Visco's speech was delivered at a central bank's meeting held here in the Italian capital. Main forecasts suggested the time needed for Italy to match pre-crisis income levels would not be short, according to the chief banker.

"Estimates of our economy's potential of growth are disappointing: we are slowly, haltingly coming out of a long period of crisis, not only financial and economic," Visco added.

He urged two main provisions."Revamping long postponed targeted public investments, also focused on intangible infrastructures, would be necessary to support a faster and more durable recovery," he said.

A further cut in the labor tax wedge, which measures the difference between total labor costs to the employer and the corresponding net take-home pay of the employee, would also be crucial, according to the governor.

The Italian economy would also benefit from a cabinet's stronger action "to bolster incentives to innovate and provide income support for the less well-off ".

"While the budget affords limited leeway for these measures today, it is possible to plan their implementation over a longer time frame," the central bank governor suggested.

"The turning point has been reached... The moderate recovery under way since 2015 is being mirrored in a significant decrease of the flow of non-performing loans," Visco stressed, referring that the recovery so far achieved was helping Italian banks reduce their burden of bad loans.

"They reached 3.7 percent of total loans in 2015, against 4.9 percent in 2014; and their flow in the family sector has decreased to pre-crisis levels," the governor said.

Bank of Italy's data showed Italian banks were overall burdened by some 360 billion euros (401 billion U.S. dollars) of non-performing loans, or some 18 percent of total loans, up to December 2015, as a "legacy of the long and deep recession".

The Italian cabinet and the Bank of Italy have been implementing several provisions to consolidate the banks and reduce such burden since last year, including the creation of a bank rescue "Atlante" fund supported by private and institutional investors in April 2016.

Net of value adjustments already made by the banks, such stock of non-performing loans would now come to just under 200 billion euros (223 billion U.S. dollars), Visco said.

"More than half that amount refers to situations where the borrower's difficulty is temporary. Looking at bad debts alone, the net value is less than 90 billion euros (100 billion U.S. dollars)," the governor said.

Visco added that the market of non-performing assets would "receive a boost from the investments of Atlante, a fund that can concentrate on the riskiest securitization tranches".

"Overall, the concerns about the quality of Italian banks' assets must be taken seriously, but without overestimating the extent of the problem," he said. (1 euro = 1.12 U.S. dollars) Endit