Huge debt, wary in­vestors put Italy at risk if growth slows down

Business Standard - - WORLD - LORENZO TOTARO BLOOMBERG

Italy’s fail­ure to get its fis­cal house in order may leave the econ­omy prone to a ma­jor crisis when the next down­turn rolls around.

The new pop­ulist ad­min­is­tra­tion has tar­geted next year’s bud­get deficit at 2.4 per­cent of out­put rather than low­er­ing it as the Euro­pean Union de­manded. The spend­ing gap may in turn add to the na­tion’s crush­ing debt bur­den, and in­vestors re­sponded neg­a­tively, send­ing stocks and bonds plung­ing.

The new tar­get is “likely to put Italy’s debt-to-GDP ra­tio on an in­creas­ingly un­sta­ble equi­lib­rium,” said Bar­clays se­nior Euro­pean econ­o­mist Fabio Fois in Mi­lan. “The risks of the ra­tio tak­ing an up­ward slop­ing path are non-neg­li­gi­ble over the medium term.”

At more than 130 per cent of GDP, the ra­tio re­mains the sec­ond-high­est in the euro area af­ter crisis-stricken Greece, and to­tals 2.3 tril­lion euros ($2.7 tril­lion) in ab­so­lute terms.

The pes­simistic fu­ture sce­nario is sim­ple. A slump in growth, along with higher in­ter­est costs, could se­ri­ously

That cur­rency slide helped boost the cur­rent-ac­count sur­plus by mak­ing euro-zone ex­ports more com­pet­i­tive.

The monthly sur­plus is now typ­i­cally well above ^20 bil­lion, com­pared with a per­sis­tent deficit in the run-up to the global fi­nan­cial crisis.

The as­set-pur­chase pro­gram will be capped at the end of De­cem­ber, and

ECB of­fi­cials have sig­naled their com­fort with mar­ket ex­pec­ta­tions for an in­ter­est-rate in­crease around the fi­nal have both said there will soon be a need quar­ter of 2019. Ex­ec­u­tive Board mem­bers to pro­vide Peter guid­ance Praet and on Benoit what hap­pens Coeure im­pair the gov­ern­ment’s abil­ity to pay off its obli­ga­tions. Ris­ing bond yields can also make it more dif­fi­cult for Ital­ian banks to sell their non­per­form­ing loans.

The ex­pan­sion in Italy, and the wider euro area, has al­ready cooled af­ter 2017’s strong per­for­mance, and down­side risks have in­creased, in­clud­ing an es­ca­lat­ing U.S.-China trade bat­tle, tighter mon­e­tary pol­icy and emerg­ing mar­ket tur­moil.

Mat­teo Salvini of the League and Luigi Di Maio of the Five Star Move­ment see things dif­fer­ently in the plan ap­proved Thurs­day night in Rome. The coali­tion lead­ers say the 2.4 per­cent 2019 deficit — which may be pen­ciled in for 2020 and the fol­low­ing year as well — will help do­mes­tic de­mand, boost­ing the broader econ­omy and trim­ming the debt ra­tio. Some econ­o­mists agree there’ll be a short­term boost, with Com­merzbank lift­ing its pro­jec­tion for growth next year.

Much of the fo­cus has been on Fi­nance Min­is­ter Gio­vanni Tria, who re­port­edly had been seek­ing to hold the 2019 deficit to 1.6 per cent of GDP but even­tu­ally yielded to pop­ulist pres­sure to raise it to 2.4 per­cent. af­ter liftoff.

“The re­gion is ob­vi­ously sen­si­tive to ex­ports, so if then the ex­change

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