Italy’s debt plans may lead to huge restructuring: EU officials
COUNTRY’S €2.3TR DEBT DWARFS THAT OF GREECE WITH ECONOMIC GROWTH AT A CRAWL
Senior European Union officials believe Italy risks facing a massive debt restructuring task — and one that would hit its own citizens hardest — unless it backs down in its unprecedented challenge to Brussels’ budget rules.
Italy’s €2.3 trillion (Dh9.72 trillion) national debt dwarfs that of Greece and the euro zone bailout fund would not be able to cope with the costs of supporting its government in a crisis. Any such crisis could threaten the euro itself, seen by many as the EU’s greatest achievement.
Since Brexit, EU officials also say they have seen that leniency gets them nowhere in dealing with governments that want to challenge their authority.
The populist government in Rome said last week it wanted to triple the 2019 budget deficit plan its predecessors set out to 2.4 per cent of gross domestic product (GDP) and keep it at that level also in 2020 and 2021.
On Monday, Italian Economy Minister Giovanni Tria presented that plan to eurozone finance ministers, called the Eurogroup.
Tria’s plan
“When Tria talked about planning a deficit of 2.4 per cent for the next three years in the Eurogroup, jaws dropped everywhere,” one senior euro zone official said. “The mood was that this was really a terrible signal.”
The increased borrowing would help pay for the campaign promises made by Italy’s ruling parties — the anti-establishment 5-Star Movement and right-wing League — to lower the retirement age, cut taxes, invest in infrastructure and boost welfare. The draft budget blatantly breaks EU budget rules that oblige Italy, which has a debt to GDP ratio of 133 per cent, the second-highest in Europe after Greece, to cut debt every year and turn its structural deficit into a surplus.
With Italian economic growth at a crawl, such plans have also raised investor concerns over Rome’s ability to repay, and Italian government bond yields have surged to 4.5year highs this week as investors sell up.
The yield rise and criticism from eurozone finance prompted Rome to suggest it could cut the deficit in 2020 to 2.2 per cent and bring it down to 2 per cent in 2021. But that was not nearly enough, officials said, even though yields fell in response.
“The positive market reaction to the Italian proposal on 2020 and 2021 is absolutely ridiculous, they are desperate to find some good news, but that means they are under an illusion,” a second senior official said.