Italy Gets Close to Debt-Cut Goal, Future Might Depend on ECB

(Bloomberg) -- Italy will have a lot of work to do to get its debt-load on a downward trajectory once the European Central Bank ratchets back its quantitative easing.

Helped by the economy’s best performance in seven years, 2017 saw long-sought convergence in the paces of debt increases, gross domestic product growth and bond yields, which means Italy is actually gaining ground and not just slipping back as it seeks to reduce the ratio of debt to output. Still, the European Commission on Wednesday urged Italy to increase efforts to cut the debt in the coming months.

But 13 straight quarters of expansion is only part of the story. That convergence wouldn’t have been possible without the extraordinary monetary stimulus of the ECB that helped Italy cut its debt-financing costs.

It remains to be seen whether the euro region’s third-biggest economy can now make its growth more sustainable by involving a bigger part of its population in the labor market recovery. The biggest unknown is what happens once the ECB puts an end to its QE program, likely in September 2018.

“Although not imminent, the end of QE poses a threat” to the country’s public finances, Fabio Balboni, an economist at HSBC Bank Plc in London, said in an interview. “Higher inflation in Italy won’t be enough to offset the effect of the possible rise in borrowing costs, being driven by higher energy prices rather than a strengthening of domestic demand.”

Bloomberg calculations based on the available official estimates of GDP, inflation, 10-year government bond yields and debt in 2018 and 2019 show that the further debt-to-GDP reductions will become less viable, posing a limit to the government’s ambitions and boosting concerns among European policy makers.

“You can’t escape from the need to reduce the debt” in Italy, the European Union Economic Affairs Commissioner Pierre Moscovici told La Stampa in an interview published on Thursday. “Whoever leads the country next year, it is in the interest of Italy to assure the respect for the rules.”

To contact the reporters on this story: Lorenzo Totaro in Florence at ltotaro@bloomberg.net, Giovanni Salzano in Rome at gsalzano@bloomberg.net.

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Kevin Costelloe, Brian Swint

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