March 18, 2013 6:30 pm

Brussels green light for Italy debt sale

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Italy is considering a substantial increase in sales of government debt to boost its recession-hit private sector after striking a deal with the European Commission that allows a relaxation of Rome’s fiscal targets.

Monday’s agreement gives Italy the green light to raise its debt levels so that the public administration can pay tens of billions of euros owed in arrears to the private sector without incurring penalties for breaching EU fiscal constraints.

It was immediately hailed by Silvio Berlusconi’s centre-right People of Liberty party as a response to February’s inconclusive Italian elections, which have been interpreted partly as a rejection by voters of austerity polices seen to be dictated by Europe.

The polls resulted in a hung parliament and political deadlock. Italy could still face weeks of uncertainty until a new administration is installed or a decision is made to go back to the polls.

Antonio Tajani, the commission vice-president, who was nominated to his post by Mr Berlusconi’s former government, told the Financial Times that Brussels was responding to the anti-austerity sentiment emerging across Europe.

He described the decision to give Italy leeway on debt and deficit targets as “a clear change in direction for Europe, a sign that we are not only focusing on austerity but we are also trying to create the conditions to foster growth, we are being flexible”.

“The basic idea is to give Italy an exit from the current quagmire in order to help boost the real economy,” Mr Tajani said. “This doesn’t mean that they will have carte blanche to overspend, it means that Italy will be given the flexibility to pay its debts to small and medium enterprise that would otherwise go bankrupt.”

Mario Monti, caretaker prime minister, welcomed the move, which could provide significant relief to a private sector reeling from recession and cut backs in bank lending. “We will work with the commission to identify technical solutions to begin to settle the payments as soon as possible,” he said.

Just how much is owed by Italy’s public sector – from small municipalities to the central government – is a matter of controversy. Italian officials cite Bank of Italy figures showing arrears of some €70bn, with settlements lagging behind by an average of about 180 days, compared with just over 30 for Germany.

Emanuele Padovani, professor of public management at Bologna university, estimates liabilities amount to at least €100bn, or 8 per cent of GDP.

The Commission said the commercial debt overhang was “sizeable” but gave no figure. “The plan should include adequate safeguards against moral hazard by the administrations responsible for the debt overhang,” it said. “A liquidation of commercial debt would be reflected in a corresponding increase in public debt.”

A senior Italian official said the government was planning to pay the arrears through substantial increases in sales of public debt on the market. Cassa Depositi e Prestiti, a state-owned financing agency that manages more than €200bn in postal savings deposits, could also be tapped to acquire the commercial debt.

Italy’s public debt has already hit a record of more than €2tn euros, or some 126 per cent of GDP – the second highest ratio in the eurozone after Greece. Despite the recession, Italy managed to keep its budget deficit under 3 per cent last year, giving it more flexibility under EU rules than other countries such as France that are struggling to hit the target figure.

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