Bloomberg News

Italy Can Cut Debt to Below 100% of GDP by 2020, Grilli Says

February 02, 2012

(Updates with comments by Grilli in second paragraph, background in third, markets in fifth. For more on Europe’s debt crisis, see {EXT4 <GO>}.)

Feb. 1 (Bloomberg) -- Deputy Finance Minister Vittorio Grilli said Italy can cut its ratio of debt to gross domestic product to below 100 percent in 2020 by meeting its target of eliminating the deficit in 2013.

“Having now a structurally balanced budget in our finances, just that per se is a huge engine of decreasing debt,” Grilli said in an interview in Rome today. “That makes us very confident.”

With a balanced budget, Italy won’t need to pass additional measures to meet new European Union debt rules, Grilli also said at a news briefing in Rome. The regulations will force nations with debt over the EU limit of 60 percent of gross domestic product to cut the excess by 1/20th a year.

On Jan. 30, European leaders completed the EU’s fiscal- discipline treaty, which speeds sanctions on high-deficit states and requires euro countries to anchor balanced-budget rules in national law. The government estimates Italy will have a budget surplus before interest payments at the end of 2011 and a debt of about 120 percent of GDP, the euro region’s second biggest after Greece.

Market sentiment is improving for Italy even as debt remains the country’s biggest problem, Grilli said. The yield on Italy’s benchmark 10-year bond slid to 5.76 percent as of 4:25 p.m. Rome time, the lowest since Oct. 11. The yield difference with German bunds narrowed to 3.86 percentage points, the least since Dec. 6.

Price ‘to Pay’

Italy’s pledge to balance its budget in 2013 was necessary, Grilli said. The fact that it will negatively affect growth “is the price that we have to pay in order to restore structural credibility at a time of uncertainties on the market,” he said.

The economic package passed by Prime Minister Mario Monti’s Cabinet on Jan. 20 won’t have an impact on growth for three to five years, Grilli added. Overall, it will amount to much more than 0.1 percent to 0.2 percent of GDP annually, he said.

The revamp will help the economy expand after years of “virtual stagnation,” Salvatore Rossi, the central bank’s deputy director general, told lawmakers in Rome today, according to an e-mailed text.

Fitch Ratings joined Standard & Poor’s last month in lowering the nation’s credit rating. Still, Italian bond yields have fallen as the European Central Bank offered banks unlimited three-year loans. The downgrades “went almost unnoticed,” Grilli said.

Boosting Growth

Italy may be in its fourth recession in a decade after GDP contracted in the third quarter of last year. Italy may contract 2.2 percent in 2012 and 0.6 percent in 2013, the International Monetary Fund estimated in its World Economic Outlook Update on Jan. 24.

The government’s projection for a contraction of 0.5 percent in 2012 and “flat growth” next year don’t reflect projected benefits from its economic legislation, said Grilli, a former director general of the Treasury.

The prediction doesn’t take into account benefits from the measures aimed at fighting tax evasion and boosting growth by increasing competition and easing bureaucracy, Grilli said.

--Editors: Jeffrey Donovan, Dan Liefgreen

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

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net.


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