Saving Italy’s Banks Means Missing Public Debt Target Once Again

Updated on
  • 20 billion-euro debt boost may push ratio to GDP to about 134%
  • Debt-cut target, missed in 2016, had been reiterated for 2017

The Lingering Problem of Monte Paschi and Italian Banks

Italian governments may come and go, but the debts they have to deal with just keep mounting.

Next year will probably bring more of the same with a new reason: the possible last-ditch rescue of Banca Monte dei Paschi di Siena SpA, the country’s third-biggest bank, as well as other troubled banks.

At a cabinet meeting on Tuesday, Prime Minister Paolo Gentiloni decided to ask the Rome-based parliament to approve up to 20 billion euros ($21 billion) in additional financing that could be used as a precautionary fund to rescue troubled lenders.

“Such an addition inevitably means that the reduction of the debt ratio would be delayed further," said Loredana Federico, an economist at UniCredit Bank AG in Milan.

In UniCredit’s 2017 Outlook report, Federico had forecast the debt ratio to gross domestic product would rise next year to 133.2 percent. She said in an interview that she now sees it 1 percentage point higher, exceeding 134 percent.

At 2.22 trillion euros at the end of October, Italy’s public debt is the euro region’s largest in absolute terms and the second-biggest after Greece as a percentage of GDP. A growing debt-to-GDP ratio may make it harder for Italy to put the economy on a steady upward path. An increase in 2017 would mark the 10th straight annual rise.

Under Matteo Renzi, Gentiloni’s predecessor, the government had committed to finally cut the load in 2017, a target already missed this year.

According to the official forecasts released at the end of September and within the budget law approved earlier this month, authorities in Rome planned to reduce the debt-to-GDP ratio in 2017. Its target for next year had been a cut to 132.6 percent, a goal that now appears to be out of reach.

That could ultimately spell trouble, once the European Central Bank starts to reduce its quantitative-easing program that has cut Italy’s debt-financing costs.

“Given that the ECB is buying everything and will continue to do so in 2017, I see no huge impact on the market for the time being,” said Jacopo Ceccatelli, head of Marzotto SIM SpA, a Milan-based broker dealer. “If and when the ECB safety net disappears, the debt issues might hit the bond market.”

— With assistance by John Follain, and Giovanni Salzano

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