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Bank of Italy warns political impasse dents economic recovery

The headquarters of the Bank of Italy is pictured in downtown Milan January 11, 2013. REUTERS/Alessandro Garofalo
The headquarters of the Bank of Italy is pictured in downtown Milan January 11, 2013. REUTERS/Alessandro Garofalo

ROME (Reuters) - Italy's political stalemate and renewed financial market turbulence could undermine the country's recovery from its longest recession in two decades, a Bank of Italy official said on Saturday.

Italian President Giorgio Napolitano on Friday asked center-left leader Pier Luigi Bersani to see whether he can win backing in parliament to form a government and end the deadlock left by elections in which no one won a working majority.

Almost a full month has passed since the vote and Italy, the euro zone's third-largest economy, still could be facing weeks of uncertainty just as the bank crisis in Cyprus renews fears of another outbreak of market turmoil in the currency bloc.

"In the past few weeks, uncertainty about the outlook for the Italian economy has been reawakened," deputy director general of the central bank, Fabio Panetta, said in the text of a speech he delivered at a conference in Perugia, Italy.

"The very moderate recovery foreseen for the last part of the year is under threat by the unpredictable domestic political situation and the re-emergence of financial turbulence in the euro area."

On Thursday, the caretaker government of Mario Monti slashed its growth forecast for this year to -1.3 percent from -0.2 previously, and raised its fiscal deficit target to 2.9 percent of gross domestic product from 1.8 percent previously.

Italy has been mired in recession since the middle of 2011 and is not expected to show any growth until the second half of this year at the earliest.

In the past five years, Italy has weathered two recessions, losing 600,000 jobs and 7 percentage points of GDP, Panetta said. Facing such a dire economic situation, Panetta urged banks to make sure their balance sheets were in order.

Panetta said the Bank of Italy was checking the adequacy of write-downs made by a large number of big and mid-sized lenders and had asked for correction measures when necessary.

"Keeping an adequate level of risk coverage allows banks to keep foreign investors' confidence and attract external funding at low cost," he said.

He said the central bank had asked banks to slash costs, also by using new technologies, sell non-core assets and adopt coherent dividend policies to boost profitability, beef up their balance sheets and keep lending to the real economy.

Italian banks have cut lending as the crisis has reduced the quality of loans, increased the cost of funding, and reduced their profitability.

(Reporting by Steve Scherer in Rome and Danilo Masoni in Milan; editing by James Jukwey)

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