CORRECT: Italy Debt Reduction Key to Calming Markets, Tria Says

(Bloomberg) -- The Italian government knows it must cut its debt load and keep the budget deficit in check in order to promote growth and gradually implement its sweeping government spending program, Finance Minister Giovanni Tria said.

“It makes no sense to seek two or three billion euros of extra deficit if we then have to pay three or four billion more due to higher yields” on government bonds, Tria said on the sidelines of the Ambrosetti Forum in Cernobbio, Italy on Sunday. He said that all cabinet members “are fully aware of that.”

Last week, Italian bonds posted the biggest weekly gain in almost three months as key cabinet members, including Deputy Premiers Luigi Di Maio of the Five Star Movement and Matteo Salvini of the League, joined Tria in reassuring investors that the 2019 budget won't breach EU rules. Italian bonds continued their rally on Monday, with 10-year BTP yields narrowing about 10 basis points.

Addressing investors and company executives at the event on the shores of lake Como, Tria said that the government plans to boost economic growth to as much as 1.6 percent. It plans to “halve the gap with the euro region” on growth “as soon as next year," he said.

Debt Pile

The EU demands that Italy maintain its budget deficit under 3 percent, but also requires the country to cut spending this year and next to reduce its debt pile. A budget that leads to fiscal expansion instead of tightening would likely lead the European Commission to declare that the country isn't compliant with its obligations.

Italian party leaders heading the coalition government have been sending contradictory signals about how far they'll push next year's budget deficit as they try to square ambitious election promises with Italy's debt mountain.

“Markets got obsessed in recent months with the prospect of a un-financeable budget deficit in Italy, an idea generated by the coalition partners' extravagant program” and their inability to speak with one voice on details and timing, Erik Nielsen, global chief economist at UniCredit Bank in London, wrote in a note on Sunday.

Once the budget is presented, “chances are that foreign investors will realize that they overestimated the fiscal risk,” Nielsen said.

Almost all reforms will start to be implemented gradually, Tria said. The reduction of the debt ratio to output, currently above 130 percent and the second-hightest in the euro region, “may bring about a strengthening and consolidation of Italy's presence on financial markets, which will free up resources and attract investments.”

Tria said gradual implementation of the government program means that both a new welfare tool promoted by the Five Star Movement and tax cuts advocated by the League will be in the budget in some form. The budget will also include some changes to the pension system, which will favor early retirement in order to allow the hiring of new staff, he said.

Deficit Target

Next year's deficit “might be higher” than the 0.8 percent of GDP targeted by the previous government, Tria told Bloomberg News in a July interview. He currently sees the level at about 1.5 percent, La Stampa daily reported last week without saying where it got the information.

Speaking to reporters in Vienna on Friday after a meeting with his EU counterparts, the finance chief said that in order to set a final target for the deficit, the government will have to wait for some more economic data to be released around Sept. 20.

To contact the reporter on this story: Lorenzo Totaro in Vienna at ltotaro@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Kevin Costelloe, Alessandra Migliaccio

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