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Italy's central bank chief confirms 2012 will be 'year of recession;" predicts growth in 2013

ROME - Italy's central bank chief on Saturday predicted that the eurozone's third-largest economy will see a return to growth next year, but he confirmed forecasts that 2012 will be a "year of recession."

Bank of Italy Governor Ignazio Visco also described Italian banks as being sound in terms of having adequate capital, but cautioned that the outlook for their profit recovery this year is not good.

Visco replaced Mario Draghi as central bank governor last fall after the latter became European Central Bank president. His speech, at a financial forum in Parma, northern Italy, followed by a few days the release of data by the national statistics agency finding that Italy's economy slid into recession in the last quarter of 2011.

"This year will be a year of recession," Visco said. "As we indicated in the forecasting scenarios set out in our 'Economic Bulletin' in January, we expect a year-on-year decline in gross domestic product of about 1.5 per cent."

But Visco stressed that "it is important to look ahead, to act in such a way that as conditions in the financial and credit markets return to normal, it will be possible to stabilize economic activity in Italy already by the second half of 2012 and return to growth next year."

Even though Italy's last two quarters saw decline, the nation's economy overall for 2011 managed to grow, but by an anemic 0.4 per cent.

Economist Mario Monti, who was tapped as premier last November, has been trying to keep Italy from being the latest victim of Europe's sovereign debt crisis. He is pressing ahead with a formula of spending cuts and structural reform with the aim of spurring growth.

Visco described Italian banks as being sound, despite being hard hit by the debt crisis. But he acknowledged that their profitability hasn't made a strong rebound, given a sharp decline in their profits following the 2009 financial crisis and recession.

"In contrast with what happened in the other main European countries, the recovery in 2010 and 2011 was modest, and the outlook for this year is not good," the central bank chief said.

But he said that when evaluating banks' capital, Italy's banking system is "extremely sound."

Although Italy's borrowing costs have significantly declined since Monti took office, they are still high when compared to rates in the first half of 2011, Visco noted. He added that "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," Visco said.

Monti managed to quickly push through ambitious pension reform, to rein in billowing costs of Italy's generous system for retirees, especially given its aging population.

He has so far failed to convince leaders of Italy's powerful unions to accept labour reforms, including measures to make it easier to fire workers. But Monti has vowed to forge ahead with the labour measures even if union leaders won't budge.

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