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Europe should prepare to support business as outlook darkens, says veteran banker

The failures of Silicon Valley Financial institution and Credit score Suisse have made a worldwide financial slowdown extra doubtless and European governments ought to be able to help companies as credit score circumstances tighten, veteran Italian banker Corrado Passera has mentioned.

“The banking disaster in the USA and the scenario at Credit score Suisse have elevated the danger of recession,” mentioned the 68-year-old, who left the highest job at Italy’s largest financial institution Intesa Sanpaolo to serve in authorities on the top of the nation’s debt disaster in 2011.

Passera, who’s now chief government of Illimity, a digital financial institution he based 5 years in the past, added he was most frightened in regards to the affect on small and medium-sized companies. Governments ought to be on alert “to compensate for lack of credit score availability, as a result of issues on this space of the market will translate to the remainder of the economic system”.

Greater than 75 per cent of Italian companies are SMEs. Illimity specialises in lending to the sector and within the administration of non-performing loans. It reported €75mn in internet revenue and had €6.5bn in whole belongings in 2022, up from €3bn in 2019.

Monetary shares have fallen all over the world after final month’s financial institution failures. Whereas European regulators have sought to reassure traders that the bloc’s banks are in a significantly better place in contrast with the monetary disaster 15 years in the past, companies are prone to be much less capable of face up to one other main shock or tightening of credit score circumstances solely three years for the reason that begin of the pandemic.

Passera identified that macroeconomics and structural adjustments in banking had created challenges for smaller corporations.

“Excessive rates of interest, financial institution department closures, which have taken away a channel to entry finance for SMEs, and the uncertainty round banks’ fairness would possibly stress this phase of the market,” he advised the Monetary Occasions.

Whereas Italy is anticipated to keep away from recession this yr, analysts and consultants have warned that the mixture of rising rates of interest, inflation and the most recent banking turmoil might have surprising penalties.

“The European Central Financial institution should not overreact and provides inflation time to chill . . . it is crucial for central banks to show that they’re aggressively preventing inflation, however stagflation [a combination of high inflation and economic stagnation] have to be prevented in any respect prices,” Passera mentioned.

“Rates of interest at the moment are ample to chill inflation.”

Final month, Financial institution of Italy governor Ignazio Visco was the primary European central banker to warn towards extended rate of interest rises. The ECB caught with a deliberate 50 foundation factors charge rise in March however policymakers have been hinting that they’ll cease rising charges.

“The job of central banks immediately is sort of tough as financial coverage actions can have opposing outcomes by way of each worth stability and monetary stability,” mentioned Passera.

“Whereas inflation must be diminished drastically, collateral injury can’t be ignored.”