ignazio visco : the sovereign debt crisis and the outlook for italy address by dr ignazio visco, governor of the bank of italy, to the 18th congress of financial markets operators organised by assiom forex ( the financial markets association of italy ), parma, 18 february 2012. * * * last november the spread between the yield on ten - year btps and their german equivalent reached 550 basis points ; yesterday at the close it stood at 365 points ; in the first six months of 2011, it had been mostly below 200 basis points. tensions remain high in the international financial markets. the difficulty in resolving the greek crisis, evident again in recent days, is transmitting turbulence to the entire european market. investor uncertainty over italian government securities has eased with respect to the worst moments of the crisis, but has not disappeared. the markets ’ attention is now focused on italy ’ s ability to make further determined progress in the restoration of its public finances and simultaneously stimulate its economic growth potential through structural reforms. the path has been set with clarity of purpose ; international public opinion acknowledges as much ; it must now be followed with perseverance and resolution. but no - one can succeed on their own. to lower the risk premiums on the government securities of the countries engaged in financial stabilization and the revival of output, decisions must be taken by common accord. the determination of all to reinforce the european construction is essential. in recent months italy ’ s economic policy has taken steps towards financial sustainability which were once deemed inconceivable, for example regarding the pension system. equally bold steps are expected on other, decisive fronts, to which the government is already committed : the efficiency of the taxation system and the fight against tax evasion ; the public sector spending review, which will analyze every item to identify possible redundancies and savings ; and the simplification of laws, institutions and practices that are blocking the country ’ s energies, reducing firms ’ competitiveness and frustrating the expectations of the younger generations. 1. the sovereign debt crisis and the outlook for italy for two years now the global financial crisis has found a new and dangerous focus in the euro area. the turbulence was initially confined to greece, whose budget situation had long been obscured by the official statistics ; it then spread to ireland, which suffered the consequences of the profound crisis in its banking sector, and to portugal, penalized by its foreign trade deficit. the limits of euro - area governance have become apparent. multilateral monitoring of national

main lenders have limited the banks ’ access to repos. one factor in market instability and the consequent funding difficulties has been the operation of automatic mechanisms. this occurred, for instance, on 9 november, when the french central counterparty, lch clearnet sa, drastically raised its margin requirements against positions in italian securities, in line with the sovereign risk framework of the british member of the clearnet group. italy ’ s cassa di compensazione e garanzia, linked to clearnet through an interoperability agreement, had to adapt in order to avoid jeopardizing the orderly functioning of the market. afterwards, the competent authorities asked the two central counterparties to review the decision and to develop a common methodology for assessing sovereign debt risks. the process must be based on an adequate statistical base, avoid automatic links with rating agencies ’ assessments, and curb the potential pro - cyclical effects. in the course of 2011, while residents ’ deposits and bonds held by households remained stable, italian banks ’ overall fund - raising from customers and the markets slowed and from november started to contract. for 2011 as a whole, it declined by 2. 8 per cent. at the same time, the banks ’ recourse to eurosystem refinancing increased considerably. a real risk was emerging that the difficulties of raising funds in the international markets would result in a bis central bankers ’ speeches contraction of lending, aggravating the cyclical downturn and inevitably triggering feed - back effects on the banks ’ balance sheets. until november italian banks ’ lending to the non - financial private sector continued to expand, although at diminishing rates. in december, however, loans to firms contracted by about €20 billion. the decline is very large by historical standards, although it may have depended in part on the usual volatility of end - year data. lending to households diminished only slightly. preliminary data indicate a slight further contraction in credit in january. certainly firms ’ demand for credit has declined, given the poor state of the economy, but surveys of banks and firms indicate a tightening of credit supply terms as well. the italian banks participating in the eurosystem ’ s quarterly bank lending survey confirm that the rise in lending rates and the strains on credit supply are due mainly to serious difficulties in raising funds in the markets as well as to growing credit risk. firms are now facing the second tightening of lending terms within just a few years. once again the banks ’ ability to