ITALY’S central bank governor urged the government Saturday to rapidly implement planned reforms and take further steps to support the euro zone’s third-biggest economy, which he said would shrink by around 1.5 percent this year.

In a keynote speech in Parma, Bank of Italy chief Ignazio Visco said the country’s banking system was solid but high costs and recession meant lenders’ earnings prospects this year were “not favorable.”

“Italian banks are sound, but they have been especially hard hit by the sovereign debt strains,” he said.

Highlighting funding strains, he said last year banks’ fundraising from customers and markets declined by 2.8 percent, while their reliance on borrowing from the European Central Bank (ECB) increased.

ECB funding to Italian banks stood at around 200 billion euros (US$289.5 billion) last month, up from just over 40 billion last June.

Thanks to measures taken recently by the Bank of Italy, and allowing domestic banks to use banking loans as collateral for ECB funds, the total collateral available to the lenders will rise to nearly 450 billion euros, Visco said.

Italy has taken steps towards financial sustainability once deemed inconceivable, Visco said, but much remained to be done.

At home, “the reforms decided must be rapidly completed and put into effect, in particular those to make the regulatory and administrative structure favorable rather than unfriendly to economic growth.”

The economy, which fell into recession in the fourth quarter, will shrink by around 1.5 percent this year, Visco estimated, in line with economists’ forecasts. The economy grew 0.4 percent last year, according to an official preliminary estimate.(SD-Agencies)

Parliament is currently debating government proposals to deregulate some service sectors and reduce red tape, and Prime Minister Mario Monti is negotiating plans for a reform of the labor market with trade unions.

Improving education and training and reforming the justice system to speed up verdicts were urgent priorities, Visco said.

Market pressure on Italy has eased since November, when the spread between its benchmark bonds and safer German bunds hit a high of around 550 basis points (5.5 percentage points) and Italy’s debt crisis looked fatal to the whole euro zone.