Rome

ECB gives Italy deficit warning as production plummets

Debt repayments, rolling back IMU property tax named as factors

ECB gives Italy deficit warning as production plummets

(By Paul Virgo) Rome, September 12 - The European Central Bank (ECB) said that Italy risked missing its deficit target for this year on Thursday when industrial production data dented hopes that the country is on its way out of recession. Premier Enrico Letta also got some bad news from the money markets, with interest rates on State bonds climbing at auction amid speculation his fragile grand-coalition government may collapse in the fallout of last month's decision by the supreme court to uphold a tax-fraud conviction against centre-right leader Silvio Berlusconi. The ECB said in its monthly bulletin that moves to pay public-sector debts to private companies and the rolling-back of the IMU property tax could affect Rome's ability to bring down the deficit-GDP ratio to 2.9%. The central bank also mentioned the decision to postpone a planned 1% rise in the top band of value-added tax (VAT), a hike Letta's left-right government is hoping to avoid completely. The European Commission closed an excessive-deficit procedure against Italy in May after its deficit came in at 3% last year and the government said it would be 2.9% this year. The EU does not allow member States to have a deficit of over 3%. Last week the Italian government said in a report that it had revised its deficit-to-GDP ratio forecast for this year up from 2.9% to 3% following the decision to scrap IMU to meet demands from Berlusconi's People of Freedom (PdL) party. "In Italy, preliminary state budget execution in cash terms up to July 2013 points to a cumulative borrowing requirement of 51 billion euros (3.3% of GDP), up from almost 28 billion euros (1.8% of GDP) in the same period of 2012," the ECB's bulletin said. "The deterioration, mainly owing to the provision of financial sector support and repayment of arrears, highlights the increasing risks surrounding the achievement of the 2013 general government deficit target (2.9% of GDP)". Letta vowed Monday that Italy would respect its commitment "to keep its deficit-to-GDP ratio under 3%" and avoid further debt following a meeting with European Council President Herman Van Rompuy. But some believe Letta may not be around for long to ensure the pledge is respected, with the PdL threatening to withdraw support and sink his executive if its alliance partner, the centre-left Democratic Party (PD), votes on a Senate panel for three-time premier Berlusconi to be stripped of his parliamentary seat after the tax-fraud conviction. The instability has lead to a rise in Italy's borrowing costs, as seen in two separate auctions on Thursday. The Treasury had to offer an average interest rate of 2.72% on three-year BTP bonds, the highest level since October last year and up from 2.33% at an auction in July, to sell all four billion euros' worth it put in the market. The rate also climbed at an auction of 15-year BTPs, with 1.5 billion euros' worth going at an average rate of 4.88%, up from 4.67% at a sale in June. The spread between the 10-year BTP and the German benchmark, a key measure of Italy's borrowing costs and of investor confidence, climbed to 255 basis points with a yield of 4.54% after closing at 248 points on Wednesday. Spikes in the spread level at the height of the eurozone crisis were a key factor in November 2011 in the fall of Berlusconi's last government, which made way for former premier Mario Monti's emergency technocrat administration. Letta, who replaced Monti as the head of an unprecedented PD-PdL administration in April to end a long deadlock after February's inconclusive general election, has warned political instability is the last thing Italy needs just as it looks to be emerging from its longest recession in over two decades. Business leaders and Bank of Italy Governor Ignazio Visco have made similar warnings. The consensus among experts was that Italy should emerge from recession in the third or fourth quarter of this year, after eight consecutive quarters of negative growth. But these hopes suffered a setback Thursday, when national statistics agency Istat said industrial production fell 1.1% in July compared to June. The drop was a disappointment to analysts as it comes after two consecutive month-on-month rises in production that had been seen as evidence Italy was pulling out of the downturn. Furthermore, it was the biggest month-on-month fall since June 2012. Industrial production was 4.3% lower in July than in the same month in 2012, the 23rd consecutive year-on-year drop, Istat said.

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