Italy Debt Could Spin Out of Control Unless Growth Picks Up

(Bloomberg) -- Italy could see its government debt spiral out of control next year unless the economy bounces back quickly from a second coronavirus lockdown, according to a senior lawmaker from the governing coalition.

“Italy will end this year with debt-to-GDP at around 160% -- if the economic rebound is limited, we risk an explosive debt dynamic already in 2021,” Luigi Marattin, who heads the finance committee in the Lower House of parliament, said in an interview Wednesday.

New measures signed by Prime Minister Giuseppe Conte ban Italians from leaving or entering cities in high-risk areas, including the financial capital Milan, as the government seeks to contain a fresh surge in infections.

The second lockdown in six months is another blow to an already struggling economy and Conte is readying at least another 1.5 billion euros ($1.75 billion) of aid for businesses, adding to the eye-watering costs of the pandemic.

“It seems clear to me that Italy will face negative growth in the fourth quarter,” Marattin said, a worse outcome than the government is projecting.

Italy’s budget assumes that gross domestic product could fall 10.5% this year in a worst-case scenario and expand only 1.8% in 2021.

Oxford Economics wrote in a note Thursday that Italian GDP could fall around 2% in the last quarter of the year after the introduction of new measures.

‘Father Christmas’

Marattin said that it is essential that Italy takes full advantage of the European Union aid it is set to receive from 2021 and warned that a delay could pose a further risk to the outlook. Rome is due to get the biggest share of EU recovery funds, with as much as 209 billion euros in grants and loans over the course of the program. However, final approval for the mechanism has been held up in negotiations with the EU Parliament.

Marattin’s Italy Alive party, a junior partner in the ruling coalition, is led by ex-premier Matteo Renzi, and is regularly at odds with both Conte and his main allies, the Five Star Movement and the Democratic Party. Italy Alive has urged the government to limit virus restrictions to help safeguard businesses.

Italy’s real problem is the failure to modernize its economy during 20 years of economic stagnation, not the virus, Marattin said in the interview. He listed “the usual suspects” of labor and capital markets, the courts and the tax system as all needing reform, and called for efforts to shift more services online and bring more women into the workforce.

Marattin said Italy should get ready for the European Central Bank to end the bond-buying program which has kept borrowing costs down so far. Even if bond yields remain historically low, Italy will face financial problems without faster growth, he said.

“ECB intervention should be seen as borrowed time,” Marattin said. “If it’s seen as Father Christmas coming and fixing all the problems, then we’ll have to explain to people that Father Christmas doesn’t exist.”

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