MARINA DI PIETRASANTA, Italy—Italy’s populist government will make a “historic choice” between what citizens need and what ratings agencies say should be done, the deputy prime minister said on Sept. 2, responding to Fitch’s cutting the outlook on Italian debt.
Fitch on Aug. 31 changed the outlook on the world’s third-largest pile of state borrowing to “negative” from “stable”, citing concerns about the government’s “new and untested nature” and its promises to hike spending.
Economy Minister Giovanni Tria responded reassuringly on Sept. 1 saying Italy would respect its European Union budget commitments with concrete policy choices in coming weeks.
But on Sept. 2 Deputy Prime Minister Luigi Di Maio, who is also leader of the 5-Star Movement, was less diplomatic, promising to follow through on his party’s main campaign pledge—a universal income for the poor.
“In 2019 the universal income must get started,” Di Maio said at a conference on the Tuscan coast. “We have to put the financing in the budget so that at least 5 million impoverished Italians can get back to work.”
Di Maio said unlike previous governments, the alliance made up of 5-Star and the far-right League party, which took office in June, would answer to citizens before ratings agencies.
“We can’t think about listening to the ratings agencies and reassuring the markets, and then stab Italians in the back,” he said. “We’ll always choose Italians first.”
By the end of the month, Italy must unveil its growth and public finance targets, and its budget outline must be approved by the end of October.
The government has said it will seek budget leeway from Brussels, but relations have soured recently over immigration, with Di Maio even threatening to veto the bloc’s next seven-year budget if the EU does not should more of the burden.
Italy’s 2.3-trillion-euro debt—equivalent to more than 130 percent of its domestic output—makes the country vulnerable to changes in investors’ sentiment.
On Aug. 31, a government official said Italy could exceed the EU’s budget ceiling next year if needed, driving short-dated bond yields to their highest levels in almost three months.
On Aug. 30, the gap between Italian and German bond yields reached its widest in just over five years.
In an interview with la Repubblica newspaper on Sept. 2, Tria repeated that Italy would honor its EU commitments, adding that once the government reforms and budget parameters are made public “the spread will narrow”.
On top of the universal income, the coalition government has said it wants to cut taxes, partially roll back a 2011 pension reform, head off an automatic VAT hike next year, and increase investments in public works.
But recent data have indicated that Italy’s economy, the euro zone’s third biggest, is slowing this year, further reducing the government’s room to maneuver.
“The government is walking on a tightrope, with a large debt load and high financing costs due to the recent increase of the BTP spread, which limits its room to maneuver,” said Andrea Iannnelli, bond investment director at Fidelity International, in an emailed note.
By Silvia Ognibene