Italy Asked to Reduce Debt-to-GDP Ratio

Rome must slash its budget deficit to have any hope of cutting down Italy's staggering debt levels, EU Commissioner Pierre Moscovici has warned. The debt-laden state has a gap of 3% between what it spends and what it gets through taxes and other income.

And according to the Brussels chief for economic affairs this deficit is standing in the way of Italy bringing down its debt pile, news outlets reported.

Italy's public debt hit a new high of €2.281 trillion ($2.71 trillion) in June, the Bank of Italy said Friday. The debt rose 2.2 billion between May and June, the central bank said. Italy's public debt is the second highest in the eurozone after Greece's. It is about 132% of GDP. Under EU treaties, Italy must progressively reduce its debt-to-GDP ratio to 60%.

In an interview with ANSA, he said: "With a 3% deficit, Italy would not be able to reduce its high public debt. Italy needs to continue following what the Finance Minister Pier Carlo Padoan calls the ‘narrow path’ between deficit reduction and growth support." Moscovic said "the 3% deficit was conceived as a limit, not a target".

He said: "The good news is that the Italian economy is finally recovering and this will facilitate the reduction of the debt." But warned the size of debts "remains the main weak point" of the country's public finances." It signals the European Commission is not going to allow Italy to break European Union budget rules.

No Time to Waste

In other remarks, Moscovici said that to launch the process of reform and achieving a greater "democratic legitimacy" of economic and monetary union, and in particular of the eurozone, "there is no time to waste" because "the divergences that already exist inside the eurozone" must be eliminated. He said "the window of political opportunity to be taken to intervene is now".

Moscovici also said that the EU's foreign investment rules must be revised and that the commission "will present concrete initiatives in the autumn".

He was speaking about action repeatedly urged by Italy, France and Germany to have greater control over foreign investments into the EU, especially from China.

Earlier this year ministers in Rome asked Brussels for space to break targets in reducing the country's deficit. Padoan previously hinted strict austerity risked fuelling support for anti-euro parties ahead of possible early elections.

Official EU rules say any country spending more than it gets in through taxes and income should be looking to cut this deficit by 0.5% a year until the budget is balanced.

Italy has already been granted permission to cut the deficit by just 0.2% this year.

Banks Creep Back

Italian banks added to their huge stock of domestic government bonds in July, data showed last Monday, after two months of sharp selling that had unnerved some investors.

This may help ease speculation that Italian banks, the biggest holders of their country’s sovereign debt, are bracing for market turbulence as the European Central Bank prepares to cut its own purchases and the country faces an uncertain general election.

Italian banks’ holdings of domestic government debt increased by roughly €5 billion ($5.97 billion) last month, according to Reuters calculations based on ECB data, leaving them holding €381 billion worth of that paper.

The biggest fall on record in June, at €20 billion, had sparked concerns that lenders were trimming their exposure in anticipation of a fall in prices when the ECB eventually winds down its €2.3 trillion bond-buying program, aimed at lowering borrowing costs and boosting inflation.

Bending the rules can sometimes be beneficial. The ECB is a case in point as it is buying more Italian bonds than president Mario Draghi's self-imposed limits allow. By allowing itself some wiggle room, the ECB is weakening a doom loop that meant bad news for Italy was a blow to its banks and vice versa.

This flexible approach is helpful. Italian banks' holdings of government debt almost eclipse their capital and reserves, making them vulnerable to any declines in bond prices.

Italy is set to hold a general election by next May, with the country’s euro membership among the issues dividing public opinion.