Italy Central Bank Urges Caution on Possible Deficit Hike

(Bloomberg) -- The governor of the Bank of Italy urged fiscal caution on the nation’s populist government, warning of a negative market reaction and an “unsustainable” risk for the country’s massive debt, as the Five Star Movement pressed for more spending and a wider deficit.

Italy Central Bank Urges Caution on Possible Deficit Hike

Ignazio Visco, speaking Saturday at a conference in Varenna, on the shores of Lake Como, warned against an unproductive budget-deficit hike given Italy’s existing burden, which trails only Greece in the euro region as a proportion of the economy. A negative market reaction would rapidly worsen the nation’s debt-to-GDP ratio, Visco said.

Given “the negative impact on economic growth due to the interest-rate increase and the crisis of confidence, the ratio would soon be on an unsustainable trajectory,” Visco said, reminding his audience how much debt the government needs to place in the market every year.

With the government of the anti-establishment Five Star and the anti-migrant League party setting new public finance and economic growth targets, tensions are rising within the cabinet as both organizations seek funds to deliver on campaign promises including a “citizen’s income” for the poor, tax cuts and rolling back pension reform. The government is due to present a draft 2019 budget for inspection to the European Commission in Brussels by mid-October.

Tria, Salvini

Visco ended his speech by telling the government that “the budget objectives must be and appear strongly and credibly oriented to financial stability.” His appeal for caution came only a day after the latest clash between Five Star and Finance Minister Giovanni Tria at a meeting on the budget, which included premier Giuseppe Conte and deputy premier Matteo Salvini, the League’s chief.

Senior Five Star officials at the meeting pressed for 16 billion euros ($18.8 billion) to 18 billion euros in extra spending, urging a deficit at 2.6 percent of output to fund measures including the citizen’s income, the newspaper La Repubblica reported Saturday. Tria refused to go over 2 percent, with “arm wrestling” over the budget lasting for hours, the paper said.

Following weeks of speculation about Tria’s future, Salvini said at a forum in Rome on Saturday he’d tell the minister: “Don’t worry. Be happy.” Salvini added Tria was doing his job, “opening and closing the purse-strings.”

Bannon Visit

Salvini was speaking at a forum held by the far-right Brothers of Italy party, which also hosted Steve Bannon, former strategist to U.S. President Donald Trump. Bannon is seeking to galvanize populist leaders and parties into a loose alliance ahead of European Parliament elections next year.

In his speech to the Rome forum on Saturday evening, Bannon praised his audience for taking on what he repeatedly called the Davos and Brussels elite.

“You are not alone. Brexit and Trump and what you voted for in March” -- a reference to the last general election -- “is all of a piece, it’s a rejection of the way things are,” Bannon said to applause. “It’s a total rejection of what the elites have foisted on Western civilization. It’s the reason that Italy now is the center of the universe of politics.”

After the mid-term November elections in the U.S., Bannon said, “I will be spending 80 percent of my time in Europe in preparation for the European parliamentary elections.” He said his movement will provide “technical work,” polling, data analytics and “set up war-rooms” to help populist parties win, “purely voluntarily.”

Ruling Parties

Speaking Thursday to lawmakers in Rome, the finance minister had reiterated that the government’s program will be gradually implemented and compatible with balancing public finances. The 2019 budget will start introducing some of the measures the ruling parties agreed upon, he said.

At the conference in Varenna, cabinet undersecretary Giancarlo Giorgetti acknowledged the importance of the European Union’s budget rules.

“We cannot neglect the limits and the commitments which come from Europe so that public finance is not exposed to other risks,” said Giorgetti, a leading League member. He said this meant the government must “use in the best way all the resources already available.”

Italy plans to sell 6 billion euros of bills due Mar 29, 2019 in an auction on Sept. 26.

(An earlier version of this story had an error about the order of speakers in eighth paragraph.)

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