April 9 (Bloomberg) -- Italy’s plan to make 40 billion euros ($52 billion) in arrears payments to private companies won’t jeopardize the nation’s commitment to keep its budget deficit within the European Union limit, EU Economic and Monetary Affairs Commissioner Olli Rehn said.
“There is scope for a phased liquidation on this commercial debt to enterprises without endangering the sustainable correction of the excessive budget deficit,” Rehn said in a speech via video link at a conference in Oslo today. The repayment will “assist the economic recovery in Italy,” he said.
In an effort to spur a rebound in the recession-hit country, outgoing Prime Minister Mario Monti’s Cabinet approved the payments to be carried out during the next two years. The government has said it can still keep its deficit below the EU’s limit of 3 percent of gross domestic product limit. Still, the payout will further inflate the euro region’s second-biggest debt.
The plan was passed with the the economy mired in its longest recession in two decades and after elections on Feb. 24-25 failed to produce a governing majority in Parliament. Pumping the funds into the economy may help ease the contraction, economists at Barclays Plc, said.
Effect on Debt
“We now expect real GDP contraction to be 1.5 percent this year versus 1.7 percent previously projected and we look for growth to rebound 1 percent next year from 0.8 percent previously,” Barclays economist Fabio Fois and strategist Giuseppe Maraffino write in a client note yesterday. “As a consequence of the increase in the funding needs, we expect the debt-to-GDP ratio to increase to 130.7 percent of GDP this year and to 132.5 percent of GDP in 2014.”
The government did not provide any projection on debt when it gave approval of the arrears payments on April 6. The European statistics agency Eurostat will release the 2012 debt data for member states on April 22.
EU leaders agreed at a summit last month on the need for greater flexibility in the reduction of public deficits at a time when most member states are in recession. “In many countries the most powerful measure is to pay back the arrears,” European Central Bank President Mario Draghi told reporters in Frankfurt on April 4, without citing Italy.
“A similar initiative to pay 26.9 billion euros in arrears in Spain last year helped boost GDP by 0.5 to 0.8 percentage point,” Fois and Maraffino said. “We penciled in a potential growth effect of 0.2 percentage point.”
The Italian government’s plan will not cover all the funds it owes. Arrears totaled 91 billion euros in 2011, the Bank of Italy said on March 28 and may have topped 100 billion euros in 2012, banking lobby ABI said last week.
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