Italy CB Urges Caution on Possible Deficit Hike

The governor of the Bank of Italy urged 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 a wider deficit in the 2019 budget.

Ignazio Visco, speaking Saturday at a conference in Varenna, Italy, 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, Bloomberg reported.

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.

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

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.