Draghi Plans 10 Billion Euros of Fresh Debt as Cost of War Soars

(Bloomberg) -- Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

Prime Minister Mario Draghi's government is planning as much as 10 billion euros ($11 billion) in fresh borrowing to help protect Italy from the fallout of Russia's invasion of Ukraine, according to officials familiar with the matter.

That new debt will feature in the country's annual economic and financial strategy that the premier will unveil in Rome on Wednesday, said the people, who declined to be named because budgetary discussions are ongoing.   

The new borrowing reduces the prospect that the heavily indebted nation might achieve greater ambitions in shrinking its deficit, with a shortfall at 5.6% of output that was originally forecast for 2022 now likely to be confirmed, they said.  

The bulk of the new money is likely to be aimed at helping families and businesses, adding to an existing bill of more than 16 billion euros spent on cushioning the impact of elevated fuel costs. 

With high gas reliance and little protection for households, Italy will be the hardest-hit major euro-area economy if energy supplies remain insecure and prices elevated, according to Bloomberg Economics. 

Italy's action follows the advice of the OECD, which last month advised governments to take fiscal measures to soften the impact of the war.

Inflation surged to the highest in three decades in March, and Finance Minister Daniele Franco says that the rising prices and uncertainty caused by the ongoing conflict are strongly impacting the economy.

That effect will also be apparent in Draghi's new strategy, which will show growth forecasts cut to well below 3% of economic output, the people said, down from 4% foreseen before the war broke out. The outlook is subject to higher-than-usual uncertainty due to the conflict. 

The new strategy is set to be approved by the cabinet and its details could still change before the announcement. A spokesman for Draghi declined to comment on the plans.  

More money for defense may feature too: last week the government was said to be considering a plan to boost military spending by 1.5 billion euros, part of measures to allocate 2% of its output to the defense sector by 2028.  

The government's update will be closely watched by Draghi's coalition parties, which in recent weeks have adopted divergent views on economic priorities and pushed for new significant borrowing to finance aid packages.

Antonio Misiani, who is responsible for economic policies for the Democratic Party, has said that “creating new deficit cannot and should not be a taboo,” adding that he expects the government to find some leeway to increase borrowing.

©2022 Bloomberg L.P.