Dott. Fazio examines the progress of the Italian economy in terms of stability
and recovery Address by the Governor of the Bank of Italy, Dott. Antonio Fazio, at the
Annual Meeting of AIOTE/ASSOBAT/ATIC/FOREX held in Milan on 25/1/97.
Yesterday the effective exchange rate of the lira was 5 per cent higher than in
December 1994. Compared with the low point reached in the March 1995 currency crisis, the
lira has appreciated by 25 per cent. To find a period in which the lira recovered to such an extent
and so fast, it is necessary to go back fifty years to 1947.
Inflation, measured on the basis of the cost-of-living index, fell to less than 4 per
cent on average in 1996; between June and December it was around 2 per cent on an annual
basis. According to preliminary figures, inflation in January of this year was less than 2 per cent.
The net external position of the Bank of Italy, excluding gold reserves, improved
from $28 billion at 31 December 1993 to $45 billion at the end of last year.
In 1994 purchases of foreign currency in the market, primarily in the first half of
the year, amounted to $7 billion; in 1995 there were net sales totalling $7 billion. In 1996
purchases were renewed, at an accelerating pace from March onwards. Yesterday the foreign
currency reserves of the Bank of Italy and the UIC amounted to $35 billion, after using $21
billion to repurchase official ecus and redeem foreign currency swaps and other short-term
liabilities.
Foreign exchange interventions have been carried out in such a way as to avoid
interrupting the appreciation of the lira. Between 1 March and 22 November 1996 the effective
exchange rate rose by 4.7 per cent; the lire needed to buy one German mark decreased from
1,056 to 998.
The lira's re-entry in the European Exchange Rate Mechanism on 25 November
1996 was at the central rate of 990 against the mark and 1,906 against the ecu. The new rate
corresponds to a depreciation of 19 per cent compared with that obtaining before the September
1992 currency crisis.
The lira re-entered the ERM after the performance of the economy and an
appropriate combination of policies had re-equilibrated Italy's external position, brought a sharp
slowdown in inflation and improved the outlook for the public finances.
The surplus on the current account of Italy's balance of payments and the return
to external equilibrium provide a solid foundation for the maintenance of the internal and
external stability of the lira.
1. The balance of payments
The actions to reduce the budget deficit, the new level of the exchange rate, wage
moderation and the stabilisation of prices have produced a shift in the composition of demand
since 1993 that has permitted growing surpluses on the external current account after a long
series of deficits.
The surplus in 1996 is estimated to have been around 70 trillion lire, or 3.7 per
cent of GDP. The surplus on goods and services was on the order of 90 trillion and in absolute
terms was the largest recorded by the leading industrial countries. The increase of 18 trillion lire
compared with 1995 was due to the improvement in the terms of trade, estimated at 4.7
percentage points.
Exports of goods and services, after rising in volume by 10 per cent on average in
each of the three previous years, remained basically unchanged. Sales of goods and services to
the other EU countries diminished-as a result of the weakness of demand, whereas exports to the
emerging countries continued to increase at a good pace.
The share of Italian exports in world trade declined compared with the previous
year, partly owing to a loss of competitiveness but mainly because of the unfavourable cyclical
situation in Europe, where more than half of Italy's exports are directed.
Imports dropped by 2 per cent in volume, compared with increases of 9 per cent
in both 1994 and 1995 and a decrease of 8 per cent in 1993; they were affected by the weakness
of domestic demand for consumer and investment goods.
The competitiveness of Italian products has diminished compared with 1995, but
still shows a large improvement on the period before the September 1992 currency crisis.
Measured in terms of producer prices, the real exchange rate of the lira shows a gain of
competitiveness of 10 per cent compared with the first half of 1992. In terms of labour costs, the
gain is on the order of 18 per cent (Figure 1).
The marked appreciation of the lira in 1996 made a decisive contribution to the
stabilisation of domestic costs and prices.
The effect of the good trade performance on the exchange rate and market interest
rates was reinforced by that of the surplus on capital movements. Portfolio investment abroad
continued regularly, generating an outflow of 53 trillion lire; foreign investment in Italy
increased substantially to 122 trillion (Table 1).
2. Italy's external position. The exchange rate of the lira
At the end of 1992 the country's net liabilities amounted to 11 per cent of GDP;
at the end of 1996 the ratio was well below 4 per cent (Figure 2).
The current account surpluses that are forecast will bring the net external position
roughly into balance by the end of this year and then make Italy a net creditor. Part of the item
"errors and omissions" consists of capital outflows that are not recorded in the capital account;
accordingly, the country's external position is almost certainly already in balance.
In September 1996 non-residents' holdings of Italian government securities
denominated in lire and foreign currency totalled 350 trillion lire, as against 290 trillion at the
end of 1995 and 100 trillion in December 1992.
This progression is evidence of foreign investors' growing interest in the Italian
securities market, but it is also the result of a policy aimed at diversifying the sources of
Treasury finance. It exposes the domestic market, albeit deep and efficient, and government
funding to interest rate movements in international markets and to the evaluations and decisions
of international investors.
The growing volume of public debt placed abroad is matched by the steady and
substantial improvement in the external balance of the private sector. Starting from a net
external debtor position of around 90 trillion lire at the end of 1992, by September of last year
households and enterprises had built up a net creditor position of around 200 trillion (Table 2).
The 1992 currency crisis caught Italian households and enterprises severely off
balance; the latter, in particular, had built up substantial foreign currency liabilities, trusting in
the stability of the exchange rate, even though this confidence was at odds with the expectations
implicit in the significantly lower cost of borrowing in foreign currency compared with that in
lire.
The depreciation of the lira resulted in Italian firms incurring heavy losses. In the
last few months of 1992 they began to reduce their foreign currency liabilities and build up their
foreign currency assets and continued to do so on a major scale in the following years. The
private sector's gross external liabilities, about three quarters of which consisted of borrowings
by non-financial enterprises, remained virtually unchanged at around 450 trillion lire; their
composition changed, however, as the foreign currency share fell sharply.
On the other hand, the external assets of enterprises, households and other
nonbank operators rose from 370 trillion lire at the end of 1992 to 650 trillion in September 1996,
with a significant increase in the proportion denominated in foreign currency.
The recovery of the lira began in the spring of 1995, partly in response to
domestic agents' perception of the return to a balanced external position in foreign currency
(Figure 3).
Compared with a net external debtor position in foreign currency of 52 trillion
lire in 1992, at the end of 1995 households and enterprises had already built up a net creditor
position of 118 trillion. In September 1996 this had risen to 126 trillion (Table 3).
In 1996 a major contribution to the improvement in the exchange rate came from
the net sales of foreign currency against lire by non-residents for portfolio investment purposes.
In the 1992 currency crisis the official reserves, acquired in connection with
short-term capital inflows, proved evanescent in defending the exchange rate.
The central bank's foreign currency reserves are now part of an external position
that is balanced overall and in surplus for the private sector.
The domestic savings accumulated in Italy over the years is now again equal to,
and in prospect will exceed, the sum of the country's capital stock, created through public and
private investment, and its huge public debt, contracted principally to finance the current
spending of the public sector.
3. The global market
The growing international integration of the Italian economy has profoundly
affected the composition of financial assets and liabilities.
The share of foreign assets, which accounted for 9.7 per cent of internal sectors'
total assets at the end of 1989, has risen in the nineties and was equal to 14 per cent at the end of
the second quarter of 1996 (Table 4).
The proportion in Italy is now similar to that in France; in Germany it is higher, at
around 20 per cent. Neither in these two countries nor in the other leading industrial countries
has it changed significantly in the nineties.
The ratio of residents' foreign financial assets to GDP is around 50 per cent in
Italy, 90 per cent in France and 80 per cent in Germany.
The diversification of Italian saving through investment abroad will continue in
line with the development of the financial system.
The growth in Italy's foreign assets in the last few years has been accompanied by
a rapid increase in its foreign liabilities.
The total financial assets of the leading industrial countries rose from 510 to 550
per cent of GDP between 1989 and 1994. Most saving and investment in these countries still has
a domestic counterpart; the share of total financial assets with a foreign counterpart is around 10
per cent and equal to around 50 per cent of GDP (Table 5).
The total of the six leading countries' holdings of foreign bonds and shares is
equal to some $4 trillion, or roughly one quarter of their GDP.
International financial integration has led, especially in the nineties, to the
emergence of a single, world market for currencies and securities linking all the leading national
markets.
In this global market the pricing and trading of financial instruments are affected
by the underlying performance of the international economy as a whole. The pattern appears to
depend above all on the tendency prevailing among instruments denominated in dollars.
The influence exerted by US financial markets, and to an even greater extent by
dollar-denominated instruments, predominates in the world economy.
The financial assets and liabilities of the United States, including those with both
domestic and foreign counterparts, account for nearly 40 per cent of the corresponding totals for
the six leading industrial countries. Japan's share is only slightly smaller, while Germany
accounts for around 8 per cent of the total and Italy 4 per cent (Table 6).
The close links with the dollar of the currencies of Latin America and many of the
emerging South-East Asian countries increase the importance of the US currency in determining
the international financial cycle.
The correlation between the yields on medium and long-term securities across
national markets appears to be close. Differentials tend to be larger during currency crises; when
conditions are calmer and inflation rates converge, yields become more closely correlated and
differentials smaller.
The yields on short-term assets are controlled by national monetary policies. In
recent years there has been a notable reduction in the power of central banks to control
longterm yields directly.
Superimposed on the underlying pattern of long-term rates in international
markets there is a set of differentials that reflect the inflation expectations present in each
country and the related medium-term expectations concerning the exchange rate.
The response of long-term yields to a change in official rates depends on the
conditions in the economy, the economic policies in force and, in particular, on the stance and
firmness of monetary policy.
The experience of the last few years in financially open economies with exchange
rate flexibility between the major areas confirms the effectiveness of monetary policy in
controlling inflation. This, in turn, exerts an influence on expectations and yield differentials,
and thereby on the level of long-term interest rates.
The mechanism is well known in monetary theory. To the extent that monetary
control is effective, it is able to influence inflation expectations and thereby interest rate
differentials and hence the nominal yields on long-term securities.
At the beginning of 1995 we announced our intention of raising short-term rates
with the aim of curbing, reversing, the increase in the very high yields on long-term securities
(Figure 4).
In the currency crisis of spring 1995 the yield differential between long-term
Italian and German securities widened to 660 basis points. The budget adjustment measures
adopted, the performance of the external accounts and the improvement in inflation expectations
caused the gap to narrow over the rest of the year (Figure 5).
In January of last year the yield differential with respect to Germany was still
around 450 basis points; the more stable political climate and the further improvement in
inflation expectations resulted in its narrowing to around 300 basis points at the end of May. The
substantial budget adjustment announced in the autumn of last year, the approval of the Finance
Law for 1997 and the further slowdown in inflation have reduced the differential to around 150
basis points.
As things stand today a reduction in official rates by a country's central bank is
effective if it is ratification of more favourable inflation expectations. These, in turn, must be
rooted in the performance of the public finances and costs. History shows many cases where the
inconsistency of other policies with the objectives has resulted in longer-term rates rising instead
of falling in the wake of an easing of monetary policy.
4. Market participants and the allocation of funds in the international market
The growing openness of national financial systems has accelerated the
development of the market for Eurocurrencies, especially that for cross-border deposits and
loans. Institutional investors, banks and the other participants in the global market need liquid
funds to carry out their financial transactions.
Dollar deposits outside the United States are equal to 70 per cent of the US
money stock. The ratio for the mark is slightly lower at 63 per cent; for the pound sterling and
the French franc it is 13 and 16 per cent respectively.
Following the complete liberalisation of Italian short-term capital movements, in
the spring of 1990 the Eurolira market also began to expand rapidly. It is now larger than the
corresponding markets for the Swiss franc, the French franc and the pound sterling (Table 7).
At the end of the second quarter of 1996 the stock of Eurolire amounted to 340
trillion lire, or 30 per cent of the Italian money stock. London accounts for a major part of this
market.
The mass of lire traded in the international financial market reflects a demand for
financial transactions that focuses mainly on the secondary market for Italian government
securities, though the demand for Eurolira bonds and derivatives is growing. The rapid
expansion of this market and the size it has grown to, despite the reduction in yield differentials,
are evidence of market participants' increased confidence in the lira.
The last few years have seen the activity of institutional investors in the global
market grow at a rapid pace. At the end of 1995 such intermediaries in the United States,
Europe, Asia and Oceania with balance sheets of at least $10 billion had total assets of $21
trillion (Figure 6).
These intermediated funds are equal to about one fifth of the estimated value of
the six leading industrial countries' total financial assets with domestic and foreign counterparts,
and equal to three times the GDP of the United States and twenty times that of Italy.
Institutional investors place the bulk of the funds they raise in their national
markets; they are nonetheless of considerable importance in the international allocation of funds
in view of how they make their investment choices and the scale of their investments.
In Italy, as in other leading countries, a large part of the funds invested abroad by
enterprises and especially households is channelled through such intermediaries. They reallocate
their resources according to the importance of the various economies, taking account of
exchange rate expectations, yields and risks.
The proportion invested in each country is determined on the basis of portfolio
optimisation criteria; the amounts involved are large enough to affect securities prices even in
medium-sized financial markets
At the end of 1995 European institutional investors had raised $7.5 trillion. They
are estimated to have invested 78 per cent of their resources, or $6 trillion, in shares and bonds.
Around $2 trillion, or roughly a quarter of the total volume of intermediated funds, was invested
outside the intermediary's home country (Figure 7).
The funds raised by US institutional investors amounted to $8 trillion at the same
date and they had invested 80 per cent of the total in shares and bonds, a figure close to that for
European institutional investors. In view of the depth and diversification of the US market, the
greater part of these intermediaries' resources was invested in domestic securities; nonetheless,
11 per cent, or around $900 billion, was invested in shares and bonds in foreign markets.
Although institutional investors in Asia and Oceania had also invested
domestically most of the nearly $5 trillion of funds they had raised at the end of 1995, their
international investments in shares and bonds are nonetheless estimated to have amounted to
$400 billion.
Taken together, these institutional investors held more than $15 trillion of
domestic and foreign shares and bonds at the end of 1995, corresponding to around 35 per cent
of the stocks of such instruments issued by the leading industrial countries.
These intermediaries' investments in shares and bonds issued outside their home
countries exceeded $3 trillion.
The configuration of exchange rates and interest rates generated in international
markets interacts with the financial variables of national markets In addition to the fundamentals
of each economy, an important role is played by all the information permitting the assessment of
the authorities' ability to implement policies aimed at achieving growth in conditions of
stability.
5. The 1995 currency crisis and the control of inflation
In the early months of 1995 the Mexican crisis and the weakening of the US
dollar prompted substantial and sudden shifts of funds, out of the weaker currencies into those
considered to be stronger. In addition to the US dollar, the Canadian dollar, the pound sterling,
the Swedish krona and the Spanish peseta also weakened considerably. The lira was hit hard:
between mid-February and mid-March it depreciated by 15 per cent.
The identification of a currency as weak or strong is linked to the general
conditions in the economy, notably as regards the state of the public finances, the external
position and the solidity of the country's institutions. In the background there are the stability of
the currency's purchasing power, competitiveness, the outlook for economic growth and the
availability of saving and the uses to which it is put.
In Italy wage moderation made it possible to avoid a cost-price spiral, but the
increase in consumer prices and the depreciation of the lira caused a marked deterioration in
expectations. Opinion surveys revealed that a surge in inflation was expected (Figure 8a).
At the same time as supplementary budget measures were adopted in February
1995, we raised the official discount rate and the rate on fixed-term advances; in May we raised
them again.
Monetary growth was drastically curbed.
At the General Meeting of the Bank's shareholders on 31 May 1995 we
announced the objective of slowing inflation in the second half of the year; we pointed out that it
was both possible and essential to reduce inflation to less than 4 per cent on average in 1996.
Towards the middle of the year inflation expectations began to improve
significantly (Figure 8a).
Market yields on government securities started to come down, especially for
longer maturities; the lira strengthened, partly owing to the appreciation of the dollar.
On 31 May 1996, in addition to confirming that the conditions existed for
inflation to fall below 4 per cent in 1996, we stated that it would be possible to achieve a more
ambitious target in 1997: an inflation rate of less than 3 per cent.
Between May and December of last year the average monthly rate of inflation on
an annual basis was close to 2 per cent.
The survey of consumer price expectations carried out last September indicated a
rate of inflation of between 3 and 3.5 per cent in the first quarter of 1997. The survey carried out
in December indicated a rate of between 2.5 and 3 per cent for the first half of this year (Figure
8a).
6. The outlook
After the breakdown of the gold exchange standard all countries' currencies
became of a purely fiat nature. This is a new epoch in monetary history.
International capital movements tend to expand, with a multiplication of money
and credit at the global level that makes it increasingly difficult for authorities to exercise
quantitative control.
The volume of funds traded, the rapidity with which they can be shifted and the
sensitiveness of market participants to economic and metaeconomic information can generate
tensions in financial markets and influence the quotations of currencies and securities, with
significant effects on economic activity and prices, even in medium-sized economies.
Greater monetary stability in Europe not only benefits individual economies but
also contributes to the solidity of the international financial system.
The weakness of the economic cycle and the curbing of inflation have led to a fall
in interest rates. Easier monetary conditions have been a major factor underlying the rise in bond
and share prices.
Monetary stability, public finances in order and flexible productive structures and
factor markets are necessary to protect individual economies from destabilising speculative
movements, to enable them to share in the benefits of the global market and economic and
financial integration in Europe.
This is the context in which policies must be implemented to permit the full
employment of all the available resources of labour, saving and physical capital.
In the last four years Italy has made significant progress in re equilibrating its
external position, curbing the budget deficit and controlling inflation.
In 1996 the slowdown in inflation permitted a substantial fall in interest rates; the
Treasury's spending on this item declined in absolute terms, despite the increase of 6 per cent in
the stock of debt. The improvement in the budget deficit suffered a setback, however. The
overall borrowing requirement grew in absolute terms and remained unchanged in relation to
GDP at 7.4 per cent. The supplementary budget measures adopted in the middle of the year
failed to prevent a large overshoot on the order of 30 trillion lire compared with the original
target set in September 1995.
In the Forecasting and Planning Report published last September the Government
increased the 1997 budget adjustment to 62.5 trillion lire, compared with 37.5 trillion envisaged
in the Economic and Financial Planning Document. This is a demanding commitment that is
already having beneficial effects on government securities prices and the financial markets.
As I pointed out in my Parliamentary hearing on the Finance Law, the forecasts of
the borrowing requirement in 1997 reflect highly favourable assessments concerning the primary
surplus; these are only compensated for in part by the significantly better-than-forecast
behaviour of interest rates.
The lower level of the primary surplus in 1996, with a shortfall of around 20
trillion lire compared with last September's estimates, will have repercussions on the results in
1997; these will also be affected by the cyclical slowdown that started at the beginning of 1996
and became more pronounced in the last part of the year.
The adjustment of the budget deficit will have to be pursued by curbing the
growth in expenditure. On the revenue side it will be necessary to reduce tax avoidance and
evasion. Further fiscal tightening would have adverse effects on domestic demand and prices.
In order to create confidence in a return to equilibrium in the medium term,
budget adjustment measures will have to be of a structural nature.
There is an urgent need to revive growth.
Italy, like many other leading European countries, is far from making full use of
its resources of saving, labour and entrepreneurial ability, with consequent economic and social
costs.
In cyclical terms the level of economic activity remains unsatisfactory.
According to the latest forecasts, the growth in GDP in 1997 will be just over 1
per cent.
The trade surplus will remain large, as will the surplus on the current account of
the balance of payments, thereby contributing to a further improvement in the country's external
position and providing support for the lira.
It will be necessary to modify the composition of public expenditure, by reducing
that on current account, in order to release the resources needed to return public investment to a
normal level. In the last few years this component has fallen by around one percentage point of
GDP. Investment will need to be directed to the areas and sectors where the shortfall in public
infrastructure is greatest, to the benefit of productivity and, above all, of employment.
The latest reduction in official rates, following that enacted in 1996, was made
possible by the improvement in both actual and expected inflation. Together with the ample
availability of saving, it also creates the conditions for a higher level of private investment.
The fall in market interest rates will be locked in only if permanent price stability
is achieved.
Monetary stability, consolidation of the public finances and economic growth are
three closely interrelated objectives. The experience of recent years shows that failing to achieve
even one of them necessarily jeopardises the other two.
The establishment and maintenance of the virtuous circle is likely to be
interrupted by the reappearance of inflationary pressures, which can be engendered by labour
costs, pricing policies that are short-sighted and unresponsive to competitive stimuli, by an
insufficient reduction or excessive expansion of the budget deficit.
Monetary policy will remain firmly directed towards producing an expansion of
money and credit that will permit balanced growth of the economy in conditions of broadly
stable prices.
The rise in the incomes of those already working must not hinder the creation of
employment. A smaller absorption of saving by the public sector will make resources available
for investment. These are the conditions for removing the most acute, most socially
unacceptable, forms of unemployment, which have been aggravated by the events of the last few
years. They will allow a host of young people with qualifications and a desire to contribute to
the development of our economy and society to become active members of the labour force.
(*)
1996
costs
labor
unit
of
(**)
index
PPI
the
the 1995
LIRA
LIRA
using
THE THE using
OF
OF
1996
1996
deflated
deflated
rate
RATES RATES
rate
rate
100 100
= =
exchange
December December
1994
- H1 H1
-
exchange
exchange
EXCHANGE
EXCHANGE
1992 1992
1992 1992
effective
effective effective
REAL
REAL
January Real Real Nominal
January
AND
AND
AL AL
105 100 95 90 85 80
Figure
AA AA AA AA AA AA AA
(*)
1996
AAA AAA AAA AAA AAA AAA AAA
1995
1994
1993
1992
POSITION
LIRA 1991
THE
1990
EXTERNAL
OF
NET
1989
RATE
1988
BALANCE,
scale.
EXCHANGE
1987
right-hand
REAL
ACCOUNT
1986
100;
=
THE
1985
1987
AND
(2)
CURRENT
1984
scale.
1)
LY'S
NovDecJan
100
AugSepOct
=
Germany France Italy Sweden
1994
COUNTRIES
MayJunJul
Apr
December
Mar
SELECTED
IN 1997; Feb
Kingdom States
1996
RATES
January
Canada Spain United Japan United
NovDecJan
23
-
EXCHANGE
SepOct
1994
Aug
Jul
EFFECTIVE
November
Jun
2
ay
MINAL
Jan
1997
Dec
advances
Nov
Oct
special
BTP
on
Sep
10-year Rate
Aug
Jul
Jun
May
ITALY ITALY
Apr
IN
IN
1997
1997
Mar
rate
RATES
RATES
Feb
January January
data data
- -
Jan
daily Overnight Discount
daily
1996
1995
1995
Dec
INTEREST
INTEREST
Nov
January
January
Oct
SELECTED SELECTED
Sep
Aug
ul
Jan
1997
Dec
Nov
Oct
Sep
Aug
Jul
GERMANY
GERMANY
Jun
AND AND
May
ITALY ITALY Apr
1997
1997
Mar
Feb
January January
BETWEEN data data
BETWEEN
- -
Jan
daily
daily
1996
1995
1995
Dec
Nov
January
January
DIFFERENTIALS DIFFERENTIALS
Oct
Sep
RATE RATE
Aug
l
olira/Euromark Bund
TEREST
TEREST
Figure 6
FINANCIAL FINANCIAL ASSETS ASSETS
OF OF MAJOR MAJOR INTERNATIONAL INTERNATIONAL INSTITUTIONAL INSTITUTIONAL INVESTORS INVESTORS (*) (*)
(amounts (amounts outstanding outstanding in in billions billions of of dollars) dollars)
10,000
Non-bank-related investors
9,000
Bank-related investors
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
EUROPE UNITED STATES ASIA and OCEANIA
GEOGRAPHICAL GEOGRAPHICAL DISTRIBUTION DISTRIBUTION OF OF THE THE FINANCIAL FINANCIAL ASSETS ASSETS
OF OF MAJOR MAJOR INTERNATIONAL INTERNATIONAL INSTITUTIONAL INSTITUTIONAL INVESTORS INVESTORS (*) (*)
24% 24%
37% 37%
40% 40%
EUROPE UNITED STATES ASIA and OCEANIA
Figure 7a
FINANCIAL FINANCIAL ASSETS ASSETS OF OF MAJOR MAJOR INSTITUTIONAL INSTITUTIONAL INVESTORS INVESTORS
BASED BASED IN IN THE THE UNITED UNITED STATES STATES (*) (*)
(breakdown (breakdown by by financial financial instrument) instrument)
Other Other assets assets
19% 19%
Domestic Domestic equities equities
36% 36%
Foreign Foreign
bonds bonds
3% 3%
Domestic Domestic bonds bonds
Foreign Foreign equities equities
34% 34%
8% 8%
Figure 7b
FINANCIAL FINANCIAL ASSETS ASSETS OF OF MAJOR MAJOR INSTITUTIONAL INSTITUTIONAL INVESTORS INVESTORS
BASED BASED IN IN EUROPE EUROPE (*) (*)
(breakdown (breakdown by by financial financial instrument) instrument)
Other Other assets assets
Domestic Domestic equities equities
22% 22%
20% 20%
Foreign Foreign bonds bonds
12% 12%
Foreign Foreign equities equities
Domestic Domestic bonds bonds
13% 13%
33% 33%
Figure 7c
FINANCIAL FINANCIAL ASSETS ASSETS OF OF THE THE MAJOR MAJOR INSTITUTIONAL INSTITUTIONAL INVESTORS INVESTORS
BASED BASED IN IN ASIA ASIA AND AND OCEANIA OCEANIA (*) (*)
(breakdown (breakdown by by financial financial instrument) instrument)
Domestic Domestic equities equities
11% 11%
Other Other assets assets
Foreign Foreign equities equities
46% 46%
4% 4%
Domestic Domestic bonds bonds
36% 36%
Foreign Foreign bonds bonds
3% 3%
(*) Partly estimated end-1995 data for institutional investors with total assets of more than $10 billion.
Figure 8
FORUM-ME SURVEY OF EXPECTATIONS REGARDING
CONSUMER PRICE INFLATION (1)
(percentage changes on year-earlier quarter)
6.0 6.0
June 95
5.5 5.5
Dec. 94
Dec.95
5.0 5.0
Sep. 95
Sep. 94
Dec. 93
Mar. 96
Mar. 95
4.5 4.5
June 94
June 96
4.0 4.0
Mar. 94
3.5 3.5
Sep. 96
3.0 3.0
Dec. 96
2.5 2.5
I II III IV I II III IV I II III IV I II III IV
1994 1995 1996 1997
actual changes in the cost-of-living index
forecasts one and two quarters ahead (old survey)
forecasts one and two quarters ahead (new survey)
Source: Based on Istat and Forum-Mondo Economico data.
(1) The survey methodology was changed in March 1995.
INFLATION
(percentages)
10 10
Istat cost-of-living index, seasonally adjusted
8 8
6 6
4 4
2 2
0 0
-2 -2
I II III IV I II III IV I II III IV III IV
I
1994 1995 1996 II1997
Annualized rate of increase in the quarter.
Annualized monthly rate of increase.
Source: Based on Istat data. Partially estimated data for January 1997.
Table 1a
BALANCE BALANCE OF OF PAYMENTS PAYMENTS
(net flows in billions of lire)
1992 1992 1993 1993 1994 1994 1995 1995 1996 1996 (*) (*)
A. OVERALL BALANCE -32,548 2,206 3,309 2,910 19,602
B. CURRENT ACCOUNT (1) (1) -34,225 17,824 24,329 44,583 53,771
C. CAPITAL FLOWS (2) (2) 10,317 14,799 -22,273 -6,563 -10,550
C.1. BANK 12,1