Italy brushes off downgrade as it plans European Union budget response

by Ben Pena October 22, 2018, 0:20
Italy brushes off downgrade as it plans European Union budget response

Bonds plunged Thursday as the European Union's executive body dispatched a letter to the Italian government requesting changes to its draft budget plan by October 22.

At the summit, Austrian Chancellor Sebastian Kurz said fiscal rules should be respected by all, adding: "Too much debt is risky".

Giuseppe Conte also faced discontent over the 2019 fiscal plan at home, calling a meeting of the government for Saturday to stave off an emerging internal rift over conditions of a partial tax amnesty. That has never happened before. Italian bonds were closed at the time of the announcement.

Italy was the only European Union member state that openly resisted the new sanctions regime, according to a confidential European Union document seen by Reuters.

Italy's government borrowing rose, with the yield on the benchmark 10-year bond on Friday hitting its highest level since 2013.

While 5 Star has always opposed amnesties, the right-wing League, with its traditional voter-base of self-employed businessmen, is more favourable.

"The general tone of the letter sent by the EC sounds tougher than what we had anticipated", Fabio Fois of the British bank Barclays Plc said.

Merkel told the Bundestag lower house of parliament in Berlin that all members of the euro zone were responsible for their own economic and budget policy. "We would therefore ask for your arguments for not taking on board the PBO's opinion", the letter said.

Italy's deficit is now projected at 2.4 percent of GDP, far higher than the 0.8 percent estimate given by the earlier center-right government.

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"If one breaks these rules", Kurz said, "then this means that Italy is endangering itself, but of course also is endangering others beyond that".

Salvini said Saturday he wasn't anxious about the downgrade or the criticism and that the Italian government was merely doing what was best for Italians.

The Italian government's brash attitude towards public spending has spooked financial markets, with many fearing a re-run of the debt crisis that almost saw Greece kicked out of the eurozone.

While Italy's deficit is well within the 3 per cent limit laid out in treaties, the Commission has demanded smaller gaps for Italy to bring down its debt load.

The government's budget plan targets a decrease of the deficit to 2.1 per cent in 2020 and 1.8 per cent in 2021.

Rome's calls for European Union funding to Russian small firms are not expected to be reflected in the joint document that European Union leaders will approve at the end of their meeting this week, diplomats said.

Moody's said the planned measures should boost the country's output, but predicted that they would have less impact than the government was predicting.

The standoff has flared up today, with several EU leaders openly criticising the Italian government over its austerity-busting budget, which contravenes European Commission rules imposed on deficits.

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