Mario Draghi

Italy’s Banks, Savings And Young People

European Central Banker Addresses ACRI On 2011 World Savings Day

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America24, 07 novembre 2011, 16:07

By the chief of the European Central Bank and former Governor of Bank of Italy Mario Draghi 

Italy’s banks have to face the impact of sovereign risk on their funding, on the value of the collateral they provide for refinancing, and on their capital market. But our banks’ exposure to Greece, Ireland, Portugal and Spain is modest, amounting to about 1 per cent of total system assets. Their investment in Italian government securities is substantial. Although the banks’ short-term liquidity position continues to be in balance as a whole, it is affected by the persistence of strains, particularly on the wholesale markets, where fund-raising has slowed markedly since the summer. The Bank of Italy continues to ask banks to maintain balanced liquidity positions; these positions undergo careful monitoring at weekly intervals by the Bank’s supervisory area.

Though diminishing, the rate of growth in lending to both households and firms remained higher in August than the rates for the euro area. In September the three-month growth came to 3.9 per cent on an annualized basis. However, surveys of firms find a tightening of lending standards and growing difficulty in obtaining credit. The bank lending survey conducted by the Eurosystem also finds signs of a tightening of supply condi- tions by Italian banks, limited for now to requests for higher interest rates.

Strong capital bases enable banks to cope with the cyclical worsening, and to contain the cost of fund-raising on the markets. On more than one occasion we have insisted that the banks should carry out capital increases. The response has been prompt so far and we trust it will continue to be so in the future. The request for temporarily higher capital ratios is necessary in order to address investors’ current worries, with benefits for banks’ funding on the wholesale markets. Our banks are up to this new challenge. We are fully confident that, as in the past, the banking foundations will shoulder their share of responsibility. The difficulties that the Italian banking system finds itself facing today have origins that lie beyond it. In the longer term, the problems can be solved at the root only by increasing the growth potential of the Italian economy as a whole and acting on the sustainability of the public finances.

The September budgetary package needs to be implemented completely and swiftly, in particular by rapidly setting up and carrying out the envisaged public expenditure revision. Historically, the capacity to save has always been a resource for the Italian economy. Last year Italian households’ net wealth was equal to eight times their disposable income, a value that is higher, sometimes considerably higher, than the ratios in the other leading advanced countries. For Italy, excluding government securities held directly or indirectly by households changes this ratio only marginally.

Today’s accumulated wealth, however, is the product of the saving of the past. Unless it is fed by new inflows, it will soon be dented. The risks are not lacking. Since the turn of the century the propensity to save has fallen by about 4 percentage points, down to 12 per cent of income in 2010, almost 2 points below the euro-area average. The decline has been sharpest among the less affluent families, who have found it harder, in the face of stagnating disposable income, to reduce spending on essential goods and services.

ACRI’s latest survey of Italians and savings found that only 13 per cent of those interviewed – the lowest value ever recorded – hope to save more next year. In part, the decline in the saving rate is due to the ageing of the population. It is accentuated not only by the diminished relative size of the younger generations but also by their diminished capacity to save. The deterioration of labour market entry-level wages, not offset by more rapid career advances, has helped to compress the propensity to save among households headed by young people. The share of young families with nil or negative saving has risen. Among those headed by persons under 35, it increased from 26 per cent in 2000 to 32 per cent in 2008. Heightened income instability also affects young people’s savings opportunities and decisions.

In the absence of more equitable intergenerational redistribution of resources, young people today will have to contribute more heavily than in the past to the public finances. For a 35-year-old in 1990, the inci- dence of taxes and social security contributions on income, calculated on the basis of remaining life expectancy and net of the value of social benefits, was equal to approximately 20 per cent; for someone 35 years old today, it exceeds 25 per cent. A factor in this increase has been the excessively slow transition to the contributions-based pension system. The older generations have been less severely affected.

The recession has exacerbated economic difficulties above all for the young. The unemployment rate of Italians aged 15-24 rose by nearly 7.6 percentage points between 2007 and 2010 (nearly 3 points more than the average for the EU-15) and that of those aged 25-34 by 3.6 points; in the 35-64 age-group, the increase was 1.8 points. One source of dif- ficulty has been the marked dualism of the labour market. Young people who lose their jobs are relatively unprotected by the existing income support programmes. Attenuating the segmentation that now exists in the labour market and making income protection programmes more universal, as well as more effective and rigorous, would help equalize employment opportunities and income prospects, which are now heavily tilted in favour of the older generations.

Contracts providing for protection that builds over time and the introduction of a modern system of unemployment benefits would make the labour market more fluid and efficient, as well as more equitable. Well- designed measures along these lines could also help stimulate labour market participation. In addition, this would benefit the propensity for forms of saving more oriented to the long term, which in turn, suitably channeled, could facilitate the birth and growth of new enterprises with greater potential for innovation. Removing the barriers to economic activity by lowering the cost of forming and running new enterprises will increase economic participation by the younger generation.

New enterprises – in which economists place their hopes both for their high potential for innovation and for their capacity to stimulate efficiency in others – are mostly in the hands of entrepreneurs under the age of 40. And they tend to employ younger workers. But they will be more dynamic and competitive only if the work force has a suitably high level of educational attainment, which is an essential factor for growth in the “knowledge-based economy.” But above all the durable achievement of faster sustainable growth requires the struc- tural reforms invoked for so long, broadly endorsed but as yet unimplemented.

Properly designed and communicated, these measures can have an immediate propulsive impact, enhancing business confidence and expecta- tions, increasing the propensity to invest, and narrowing the spread on Italy’s public debt.

 

Excerpts from Mr Draghi’s speech to the Association of Italian Savings Banks, Rome; 26 October, 2011

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