Bank of Italy Savages Populist Plan as Tria Defends Spending

(Bloomberg) -- Italy’s central bank governor and finance minister publicly sparred over the populist government’s plan to solve chronic low growth by boosting spending.

The criticism from the central bank piles domestic pressure onto a populist administration that’s already under fire from investors and the European Union. The back-and-forth also highlights how divisions over the budget are becoming entrenched within the nation.

“The growth divide between Italy and the rest of the euro area is a structural problem that can’t be solved by monetary stabilization policies or by expanding the government’s budget,” Bank of Italy Governor Ignazio Visco said in Rome. Also at the event was Finance Minister Giovanni Tria, who retorted that the spending plans are aimed at reducing that gap.

Bank of Italy Savages Populist Plan as Tria Defends Spending

The direct attack on the key tenets of the government’s policy comes amid growing signs of the economy’s difficulties. Growth unexpectedly stalled in the third quarter and unemployment jumped back above 10 percent in September, leaving it 2 percentage points above the euro-area average.

Tria -- plucked from academia to head the finance ministry -- insisted that fiscal stimulus is necessary to get the economy moving again. The government has two weeks to send the EU a revised budget but has so far signaled no intention of backing down. In the meantime, investors have pushed bond yields to the highest in more than four years.

‘Responsible Budget’

“Economically and socially, we cannot afford the cost of a no-deficit policy,” he said. “We are convinced that the budget law deficit level is not only sustainable, but also responsible.”

Bank of Italy Savages Populist Plan as Tria Defends Spending

The rise in borrowing costs has fueled concerns about Italy’s ability to repay its debts. Visco, who also sits on the Governing Council of the European Central Bank, stressed that the nation’s debt is sustainable.

“But there must be a clear commitment to keeping it that way," he said. That means "putting the debt-to-GDP ratio on a credible path of long-term reduction.”

That the commitment must be “credible” is key. The government’s target for 1.5 percent growth in 2019 is seen as optimistic. If growth falls short, the extra spending would set debt on an upward path.

“I am sure the debt will fall, because we are spending more on investment, above all on investment in human capital,” Deputy Premier Luigi Di Maio from the Five Star Movement said on Wednesday.

Yet Visco said the surge in borrowing costs since the coalition took power, if not reabsorbed soon, will cost the state more than 5 billion euros ($5.7 billion) next year. It’s also weighing on banks’ funding and pushing up borrowing costs for companies and households.

Giancarlo Giorgetti, a leading figure in coalition partner the League, said Visco’s warnings “are always the same but they are constantly repeated.”

“These are things we already knew,” news agency Ansa quoted Giorgetti as telling reporters at the prime minister’s office. “We have constructed a budget plan that is more optimistic.”

Intesa Sanpaolo SpA chief Carlo Messina said he’s not concerned about the impact of falling bond values, seeing “absolutely” no sign of depositor flight from banks. Shares in Italian banks have plummeted in recent weeks, as lenders hold much more of their government’s debt than their peers in any other European country.

He called on officials to end all doubts about the government’s commitment to stay in the euro as a first step to bring down bond yields.

“Uncertainty adds to volatility in financial markets,” he said.

©2018 Bloomberg L.P.