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Visco Says Italy’s Debt Load Is ‘Severe Constraint’ on Economy

Visco Says Italy’s Debt Load Is ‘Severe Constraint’ on Economy

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Italy urgently needs a “credible” strategy to cut a public debt load that risks imposing a “severe constraint” on the economy, European Central Bank Governing Council member Ignazio Visco said.

The ratio of debt to economic output may exceed the levels targeted by the government in its latest plan, Visco, also the Bank of Italy governor, said at the central bank’s annual meeting in Rome on Friday. “There must be no delay in defining a rigorous and credible strategy for its reduction in the medium term” including a review of spending and taxes, he said.

Visco’s call for greater budget discipline comes as the European Commission is also pressuring the Rome government to make good on its promises to reduce the debt load. That clashes with the view of Italy’s populist government, which favors higher spending and tax cuts to stimulate the economy and rein in the debt by boosting revenue.

The government’s current plan targets debt equal to 132.6% of GDP this year and 131.3% in 2020. Visco noted in his speech that the 2019 goal relies partly on a target of 18 billion euros ($20 billion) in revenue from privatizations.

Getting Worse

The Commission warned earlier this month that Italy’s fiscal situation will worsen this year and next, as a slight economic pickup isn’t enough to keep its debt and deficit from rising. The nation’s structural deficit -- which excludes one-time expenditures and cyclical effects and is a key figure for EU budget rules -- is forecast to worsen by 0.2 of a percentage point in 2019 and 1.2 points next year, when the debt will exceed 135% of economic output, according to the Commission.

The government is likely to respond Friday to a letter from the commission asking Rome to explain its failure to make good on promises to reduce the debt. Finance Minister Giovanni Tria is expected to reply that tightening this year would be hard on an economy that has just emerged from a technical recession, further hindering the government’s efforts to reduce the debt load.

Italy’s efforts to improve its public finances require it to contain its borrowing costs, Visco said.

“The tension in Italy’s government bond market are curbing growth prospects,” the governor said. The euro region’s third-biggest economy remains 4 percentage points below the peak of 2007 or before the financial crisis whereas, all the region’s other main economies have long ago returned to the pre-crisis level.

Visco Says Italy’s Debt Load Is ‘Severe Constraint’ on Economy

Italian government bonds fell on Friday with the 10-year yield rising to 2.72%, pushing the spread with Germany’s equivalent bonds to above 290 basis points.

Concerns over Italy’s compliance with the EU fiscal guidelines damped investor sentiment earlier this week. Deputy Prime Minister Matteo Salvini, who pledged to change the EU’s “old and obsolete rules,” led his League party to a decisive victory in European parliament elections Sunday. On the stock market, Italian banks holding high amounts of government bonds were among the biggest decliners.

Bank Risks

Those issues add to long-running concerns about the the country’s financial industry, where banks are still carrying large piles of soured debt even after selling off billions of euros in non-performing loans.

Italian lenders are relying on continued cost cuts to bolster profit as low interest rates and a weaker Italian economy weigh on revenue, with income from lending, trading and fees under pressure.

“The need remains for continued decisive action to reduce costs and improve profitability,” Visco said.

Earlier this month, the Bank of Italy said the country’s lenders remain exposed to risks including slowing economic growth and high government bond yields. Those headwinds will limit their ability to increase interest income and a long slump may cause credit-risk costs to rise again, it said.

The Italian economy expanded 0.1% in the first quarter, statistics bureau Istat said earlier on Friday, revising a preliminary growth rate of 0.2% given April 30.

Bad Loans

UniCredit SpA and Intesa Sanpaolo SpA, the biggest and healthiest lenders, reduced risk significantly, as did most of their peers. Italian banks shed more than 17 billion euros of soured debt in December alone, according to Bank of Italy data. That reduces their pile of non-performing loans to about 189 billion euros from their peak of more than 360 million euros in 2016. Still, they are sitting on the EU’s biggest pile of soured debt.

“More than half of banks’ net NPLs now consists of exposures to firms in temporary difficulty,” Visco said. “It is important to do as much as possible to enable these loans to be reclassified as performing,” he said, citing the possible use of specialized investors such as turnaround funds.

To contact the reporters on this story: Lorenzo Totaro in Rome at ltotaro@bloomberg.net;Sonia Sirletti in Milan at ssirletti@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Ross Larsen, Dan Liefgreen

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