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

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