Published: Wed, November 14, 2018

IMF warns Italy's spending plan makes country vulnerable

IMF warns Italy's spending plan makes country vulnerable

Italy's populist government maintained its controversial 2.4 percent budget deficit in responding to European Union demands for changes, but made tweaks during a late-night Cabinet meeting Tuesday, including adding plans to sell off some government real estate.

Rome has so far given no sign it will alter its budget, which foresees a deficit of 2.4% of gross domestic product next year - against 0.8% set by a previous government.

The commission predicted Italy's budget would push its deficit to 2.9 per cent of GDP in 2019, rather than the 2.4 per cent estimated by Rome, and that it would rise to 3.1 per cent in 2020 against Italy's 2.1 per cent estimation - above the bloc's limit.

Last week's meeting between Eurogroup President Mario Centeno and Giovanni Tria, the Italian Minister of the Economy, did not signal a breakthrough in the standoff. The big concern is that doubts about Italy's debt could rekindle financial turmoil as well as questions about the future of the euro.

In October, for the first time ever, the European Commission rejected Italy's draft spending plans as an "unprecedented" deviation from eurozone rules and asked for a resubmission.

The Commission said on Thursday Italy's economy would grow more slowly in the next two years than Rome thinks, with GDP rising 1.2 percent in 2019 and making budget deficits higher than assumed.

"I expect the Italian government will take the necessary decisions that make it possible to avoid getting into difficulties... 126.7 percent in 2021", he said.

Deputy Premier Luigi Di Maio told reporters in Rome that the government was not changing the ambitious social spending plans in its draft budget because "it is our conviction that this maneuver is what the country needs to relaunch". However, given that the Italian government is mostly populist, it will find it hard to pursue such important changes in budget.

The European Commission "will make the first step to move Italy into EDP" after a debt update expected on November 21, said Lorenzo Codogno, former chief economist at the Italian Treasury Department.

The country will likely be given three to six months to prepare correction plans, after which nothing will happen until a new Commission takes up office at the end of next year following European Parliament elections, he said.

The Italian government could face sanctions if it does not comply.

The Italian governing coalition argues an increase in spending will kick-start growth.

The fear is that stress in Italy could spread to other European countries which are only just recovering from the eurozone debt crisis.

Shayne Heffernan Funds Manager at HEFFX holds a Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reach a peak market cap of $15b.

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