Weekly Market Outlook

Draghi Says Italy Must Address Weaknesses No Matter What Happens

European Central Bank President Mario Draghi said that Italy will have to undertake economic reforms, no matter what the outcome of the country’s political crisis.

“The vulnerabilities that both the banking system and Italy have, have been there for a long time,” Draghi said at a press conference in Frankfurt on Thursday. “So they ought to be coped with, and I am confident the government knows what to do, and they will be dealt with.”

The euro area’s third-largest economy is facing political turmoil after voters’ rejection of a constitutional overhaul prompted reformist Prime Minister Matteo Renzi to resign. The country’s political leaders are starting discussions that may lead to the appointment of a technocratic government and early elections.

“Countries that need reforms have to undertake them regardless of what is the general political uncertainty because the best way for countries to cope with this uncertainty is actually to restore growth and employment and job creation,” Draghi said in his press conference.

Bank Pressure

The country’s return to political crisis has rekindled pressure on its financial institutions, particularly on Banco Monte dei Paschi di Siena SpA, the only lender to fail a Europe-wide stress test this year. The ECB’s Supervisory Board discussed Monte Paschi’s request to delay its recapitalization on Thursday, the first day of a two-day meeting.

Asked about the beleaguered lender’s situation, Draghi didn’t answer, referring to the separation principle between ECB monetary-policy and supervision functions. He also declined to answer a question on press reports that Italy will ask for a 15 billion-euro ($15.9 billion) loan from the European Stability Mechanism to help Monte Paschi and other weak banks, instead citing an ESM guideline on the issue.

Even so, addressing the country’s political uncertainty he reaffirmed the central bank’s intention to act as a stabilizing presence for the euro area.

“The underlying narrative of our monetary-policy decisions was exactly to maintain the extraordinary degree of monetary accommodation we have in place,” Draghi said in response to a question on Italy’s reliance on the ECB’s stimulus. “The second purpose is to transmit a sense that the presence of the ECB on the markets will be there for a long time.”