VZCZCXRO9687
RR RUEHAG RUEHDF RUEHIK RUEHLZ
DE RUEHRO #1686/01 1571527
ZNR UUUUU ZZH
R 061527Z JUN 06
FM AMEMBASSY ROME
TO RUEHC/SECSTATE WASHDC 4989
INFO RUEHFL/AMCONSUL FLORENCE 1450
RUEHMIL/AMCONSUL MILAN 7190
RUEHNP/AMCONSUL NAPLES 1518
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES COLLECTIVE

UNCLAS SECTION 01 OF 02 ROME 001686 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/WE/DL 
TREAS TO HULL 
USDOC 4212/ITA/MAC/OEURA/CPD/DDEFALCO 
 
E.O. 12958: N/A 
TAGS: ECON EFIN IT
SUBJECT: BANK OF ITALY--DRAGHI'S FIRST PERSONAL AND 
RECOGNIZED TOUCH 
 
REF: A) ROME 943; B) ROME 449 
 
ROME 00001686  001.2 OF 002 
 
 
¶1.  Summary:  At the Bank of Italy (BOI) annual 
stockholder's meeting May 31, Mario Draghi, the new 
central bank governor, focused primarily on the need 
for structural economic reforms.  Emphasizing the lack 
of growth this decade, Draghi focused on recapturing 
competitiveness to achieve economic growth.  He 
targeted reform of labor rules, the pension system, 
and capital markets.  BOI stockholders received the 
governor's report with measured enthusiasm and praised 
Draghi's open, straight-talking style.  End-Summary 
 
Draghi's Program 
---------------- 
 
¶2.  Draghi outlined his plan to strengthen banking 
supervision, adapting it to new international rules, 
and make BOI a trusted, independent advisor to 
Parliament, the Government, and the public.  He will 
reorganize BOI's central administration and branches, 
and redefine specific tasks. 
 
Public Spending and Pensions 
---------------------------- 
 
¶3.  Governor Draghi highlighted several issues on 
which the Bank of Italy had not provided leadership in 
the past, including rationalized public spending, 
competitiveness, labor market issues, service-sector 
liberalization, legal system reform, and education. 
In these areas, Draghi said the BOI would encourage 
improvements that will promote systematic and 
sustained growth.  The Italian economy enjoys many 
strengths, he said, not the least of which is 
stability.  Draghi pointed out that the "common 
monetary policy has given the euro area price 
stability and protection from the volatility of the 
financial markets."  However, Draghi noted "the 
benefits of the single currency for public finances 
have largely dissipated" and the remaining advantage 
will disappear as interest rates rise thus increasing 
Italy's debt service. 
 
¶4.  The Governor called for reducing the growth of 
public spending, which has risen over the past decade 
by 2.5 percent per year and in particular called for a 
deficit reduction package equal to two percent of GDP 
(30 billion euro).  Draghi further noted that Italian 
pension spending amounted to 15.4 percent of GDP and, 
more importantly, a quarter of this money was paid to 
pensioners under the age of 65.  Draghi said that 
Italy needed to develop supplemental pension schemes 
and significantly raise the average retirement age. 
On health care, Draghi called for continued 
decentralizing of government responsibility to 
increase efficiency. 
 
Competition 
----------- 
 
¶5.  Governor Draghi spent considerable time addressing 
Italy's lagging competitiveness.  "Competition" he 
said, "is the best agent of social justice in an 
economy and in a society such as Italy's, in whose 
history the privileges of the few have commonly been 
rooted in the protection of the State."  He voiced 
support for greater labor flexibility, but called for 
some changes in the Biagi Law and reform of the 
unemployment indemnity combined with opportunity for 
training. 
 
¶6.  Draghi praised the Italian government's past 
privatization efforts and called for renewed vigilance 
to ensure that local authorities do not expand public- 
sector's stake in businesses.  Finally, Draghi talked 
about Italy's under-developed financial markets.  He 
noted that in Italy "funds raised directly in the 
market by firms in the form of listed shares and bonds 
represent only 17 percent of their financing in Italy, 
about a quarter less than in France and Germany; the 
figure is higher than 40 percent in the United States 
 
ROME 00001686  002.2 OF 002 
 
 
and close to 50 percent in the United Kingdom."  In 
calling for the development of capital markets, Draghi 
emphasized the importance of pension and investment 
funds as key suppliers of capital. 
 
Banking 
------- 
 
¶7.  Draghi characterized the Italian banking system as 
financially sound, noting that the return on equity 
among Italian banks is between 12 and 16 percent. 
Draghi remarked that the Bank of Italy would relax its 
notification requirements for bank acquisitions (Ref 
A).  Draghi also announced that he will present to the 
next meeting of the interministerial committee for 
credit and savings (CICR) a proposal to reform rules 
governing banks' holdings in non financial companies, 
in line with EU regulations.  He also supported more 
mergers in the banking sector.  In the area of 
financial market oversight (Ref B), Draghi voiced 
support for transferring some powers from the central 
bank to other authorities, such as Consob, Italy's 
securities market regulator, and the Antitrust 
Authority.  The division of responsibilities among 
regulators, he asserted, will improve oversight and 
speed the decision process. 
 
Return to Growth 
---------------- 
 
¶8. "Return to growth" was the unifying theme of 
Draghi's speech.  According to Draghi "If slow growth 
persists for long, it stifles an economy's ability to 
innovate and saps the aspirations of the young.  It is 
especially worrying in a country such as ours, with 
its adverse demographic trend and high public debt." 
The central bank's mission is preserving financial 
stability that is a necessary condition for economic 
growth. 
 
Bankruptcy Regulation 
--------------------- 
 
¶9. Draghi also made a reference to recent reform of 
Italy's bankruptcy law.  Draghi mentioned that the law 
introduces instruments to promote a more rapid 
reorganization of firms in temporary difficulty. 
However, Draghi also mentioned the weak points of the 
new regulation: it only covers half of all Italian 
businesses and that a significant number of companies 
are not eligible for cancellation of residual debts at 
the end of bankruptcy procedures.  Moreover the law 
maintains criminal penalties, which perpetuates a 
punitive concept of bankruptcy that discourages risk 
taking. 
 
COMMENT 
-------- 
 
¶10. Almost unique among industrial world central banks, 
the BOI is a private institution with a Board of 
Governors and stockholders.  Draghi's first major 
speech as governor was well received by an audience 
composed largely of bankers, industrialists, 
economists, and policy makers.  Embassy contacts at 
the BOI seem genuinely happy with the change in 
leadership.  Draghi brings to the job a more down-to- 
earth, accessible style than his predecessor, who left 
under pressure following alleged efforts to block 
mergers between Italian and other European banks. 
 
Spogli