Italy Warned by EU Over High Public Debt With Spillover Risk

(Bloomberg) -- The European Commission warned that Italy faces excessive economic imbalances as the country’s shaky center-left government struggles to control public debt, boost sluggish growth and mend ailing banks.

Troubles including soured bank loans risk spilling into other euro-area countries, the commission said on Wednesday. Italy’s public debt is projected to rise to 133.3 percent of gross domestic product this year from an estimated 132.8 percent in 2016.

“High government debt and protracted weak productivity dynamics imply risks with cross-border relevance looking forward, in a context of high non-performing loans and unemployment,” the European Union’s executive arm in Brussels said in a set of annual policy recommendations to EU governments.

Italy is struggling to maintain government stability amid infighting in the ruling Democratic Party, where some members are pushing for early elections. The country also faces sluggish GDP growth of 0.9 percent this year and lingering issues at domestic banks, which are weighed down by 360 billion euros ($378 billion) of bad loans that have eroded profitability, undermined investor confidence and curtailed new lending.

“The stock of non-performing loans has only started to stabilize and still weighs on banks’ profits and lending policies, while capitalization needs may emerge in a context of difficult access to equity markets,” the commission said.

In May it plans to recommend whether Italy should be subject to a stricter oversight regime -- one with fines as a last resort -- for failing to keep public debt on a trajectory toward the EU limit of 60 percent of GDP. The assessment will take into account final economic data for 2016 and Italian government pledges to adopt by the end of April budget-austerity measures worth 0.2 percent of GDP.

Italy’s “debt-to-GDP has finally stabilized but it’s in the national interest to reduce it with a limited adjustment of the consolidation process,” Finance Minister Pier Carlo Padoan wrote on Twitter after the release of the commission report. The effects of Italy’s reforms “are visible: growth is back, employment is rising, credit is working better. But more needs to be done,” he said.

--With assistance from Chiara Albanese and Chiara Vasarri

To contact the reporter on this story: Jonathan Stearns in Brussels at jstearns2@bloomberg.net.

To contact the editors responsible for this story: Alan Crawford at acrawford6@bloomberg.net, Dan Liefgreen, Ross Larsen