Italy needs new ECB rules on bad debt: IMF's Thomsen

WASHINGTON (Reuters) - The International Monetary Fund supports the European Central Bank's new proposals to tackle non-performing loans and Italy needs the measures to boost confidence in its banking sector, IMF European Department chief Poul Thomsen said on Friday.

Italy has protested the ECB's proposals to sharply increase provisions on newly classified non-performing loans, arguing they would punish the country's struggling bank sector and limit credit, particularly to small firms.

Under the new proposals, if a loan is classified as impaired after Jan. 1, a bank will have to raise provisions to 100 percent over two years in the case of unsecured loans and seven years for secured loans.

The ECB is concerned that nearly 1 trillion euros worth of soured loans are clogging up bank balance sheets and holding back lending, offsetting the very stimulus the central bank is trying to provide through low interest rates.

"We are strongly supportive of the (ECB's) recent proposal to strengthen provisioning against new non-performing loans," Thomsen said in a press news conference at the IMF and World bank fall meetings in Washington.

"It is by no means a disproportionate measure given that it only pertains to new non-performing loans and not to existing stock."

"The recent steps from the (ECB) are much welcome from the Italian perspective; this is what Italy needs to boost confidence," Thomsen said. "Italy has .... a relatively high level of non-performing loans and a history of relatively low growth and this is the time to address these issues."

Italy is worried that the rules could trigger a credit crunch and thwart economic growth. Some officials also worry that the proposals may be the first step in imposing similar rules on bad debt already on the books.

(Reporting by Balazs Koranyi and Jan Strupczewski; Editing by Paul Simao)

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