Italy Responds to Ratings Threat, Says Budget Will Calm Markets

(Bloomberg) -- Italy’s budget will calm investor nerves when it’s unveiled in the coming weeks, Finance Minister Giovanni Tria said amid rising borrowing costs and the threat of a ratings downgrade.

The coalition government’s fiscal plans have been an investor focus all summer, with bond yields pushed higher in response to the new populist government’s expensive election promises. Those include hefty tax cuts and some form of universal income for the poor that could have a negative impact on the country’s debt and deficit.

On Friday, Fitch Ratings changed its outlook on Italy to negative from stable. The grade is currently just two notches above junk.

But Tria hit back at charges the budget could go off the rails and breach agreed-upon European Union covenants including a deficit ceiling of 3 percent of gross domestic product. He also said the spread between Italian and German debt, which last week touched levels reminiscent of the financial crisis, will come down when budget details are unveiled.

“Budget stability will be respected,” he said. “The spread will narrow.”

Since his appointment, Tria has often tried to soothe markets when it comes to concerns about the costly wish lists of the government’s two coalition partners. The rightist League favors a flat tax, and the program of the anti-establishment Five Star Movement calls for a “citizen’s income,” which critics have dubbed an expensive handout.

Despite the wide-ranging promises and seeming disagreements in the coalition on priorities, Tria told the newspaper that the government has an “agreement on the confines of the budget,” and it will be revealed by the end of this month.

Separately, Deputy Premier Luigi Di Maio said the Italian government faced a choice between listening to ratings companies and putting the Italian people’s interests first.

“The two things aren’t necessarily opposed to each other, but if that is the case, we will always choose the Italians,” Repubblica quoted Di Maio as saying at a rally in Tuscany. “We can’t think of reassuring a rating agency and the markets, and stabbing Italians in the back.”

The government is expected to set new public-finance and economic-growth targets by Sept. 27 and submit a draft budget to the European Commission by Oct. 15.

Italy’s current targets, agreed with the EU, see the deficit falling from 1.6 percent of GDP in 2018 to 0.8 percent in 2019, with a balanced budget in 2020. Tria told Bloomberg News in July that his aim is not to worsen the structural-budget situation and possibly to improve it. Still, he’s also said that slower-than-expected economic growth means the deficit is heading toward 1.2 percent in 2019.

The eventual end of the European Central Bank debt-purchasing program will be a “blow” to many countries, with the difference that Italy’s growth is “less strong,” Tria said. Still, the finance minister insisted that the country “isn’t fragile, it’s not the sick man of Europe.”

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