Renzi's For-Sale List Too Short to Reach Italy's Debt-Cut Goals

  • Postal system stake was sold, with railroad IPO seen in 2016
  • Promise to lower debt might require new taxes or stake sales

Selling stakes in Italy’s postal service, state railroad and air-traffic controller might not be enough for Matteo Renzi, sending more state assets to the auction block to limit the national debt.

The Italian premier has promised to slash the country’s huge debt, which reached a euro-era record of 136 percent of gross domestic product at the end of June. The government said Friday it has raised at least 6.6 billion euros ($7.3 billion) from stake sales and other similar operations this year. While the number meets Renzi’s target for privatizations, it may still not be enough to tame the country’s finances.

“In the end, I don’t think the debt will come down next year,” said Gianluca Ziglio, executive director of fixed-income research at Sunrise Brokers LLP in London. “At that stage, the government may blame an unsatisfying nominal growth for that and will possibly try to make up for it through the sale of some more assets or raising additional tax revenues.”

Bond-Buying

Both the premier and his finance minister, Pier Carlo Padoan, say Italy’s 2.2 trillion-euro debt will start falling in 2016 thanks to economic growth forecast at 0.9 percent this year and 1.6 percent targeted for next year. Yet, both the Organisation for Economic Cooperation and Development and the International Monetary Fund predict 2016 growth lower than Renzi’s plan, while the global outlook is getting murkier.

For now, the shield provided by the European Central Bank’s bond-buying program, which is set to last until September 2016, will ensure Italy’s bond yields stay close to all-time lows. On Oct. 22 Italy’s 10-year yield spread with equivalent German bunds closed below 100 basis points for the first time since March. It was at 96.3 basis points on Friday before widening on Monday to more than 107 as ECB President Mario Draghi said further stimulus may not be necessary in December.

Italy’s “commitment to stick to its privatization targets can have a strong signaling effect and contribute to boost the government’s credibility vis-a-vis European institutions as well as bond investors,” said Loredana Federico, an economist at UniCredit Bank AG in Milan.

The chart below shows the debt progression under the four most recent prime ministers.

After coming to power in February 2014, Renzi promised privatizations equal to 0.7 percent of GDP each year. As of September, that target has been scaled back to 0.4 percent for this year, and 0.5 for 2016 and in each of the following two years. Part of that will come from the IPOs of the national railroad and air-traffic controller Enav slated for next year. The rest will involve some creative financing or more stake sales.

If needed to cut the debt, Renzi “could consider a wealth levy, which would also allow for a lower tax burden on companies’ and households’ income,” said Alessandro Pansa, director of the Master in Corporate Finance program at Rome’s LUISS Business School. “As a second best, he could consider the partial sale of non-strategic assets,” said Pansa, a former chief executive officer of state-controlled defense manufacturer Finmeccanica SpA.

Real Estate

“We are excluding the case of a massive asset disposal plan and thinking about a more gradual and realistic, approach” UniCredit’s Federico said. “Where we see large room for maneuver is the sale of real estate and the gradual improvement in the real estate outlook over the coming few years could help to remove another current obstacle to a plan of real estate asset sale.”

The value of Italy’s real estate and lands that central and local administration could sell total 59 billion euros, according to the state-property agency. Those are part of state-owned real-estate assets worth between 320 billion and 425 billion euros, according to different estimates provided by government officials over the last five years.

In February Italy sold a stake worth 2.2 billion euros in Enel SpA, the country’s largest utility, though it still holds more than 25 percent of the company. In March the Treasury said it’s not planning to sell its stake in Eni Spa, Italy’s largest energy producer. Italy owns more than 30 percent of Eni directly and indirectly through state lender Cassa Depositi e Prestiti SpA.

“While ensuring quick cash, the sale of stakes in Eni, Enel or Finmeccanica would deprive Italy of key tools of industrial policy,” Pansa said.

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