INTERVIEW: Italy Could Seek To Soften ESM Bailout Fund Reform

By Silvia Marchetti

     ROME(MNI) - Italy might still have time to modify an already-agreed reform

of Europe's bailout fund before it is finalised next month, an economist looking

into the proposal for the Italian parliament told MNI, adding that the changes

would mean the country could be pushed into an unnecessary debt restructuring if

it ever needs financial support.

     A broad deal to overhaul the European Stability Mechanism, agreed by

eurozone finance ministers in June, should be ready for final approval by

December ahead of ratification by member states next year. It foresees only

making credit lines available if conditions are met including two years of a

fiscal deficit of no more than 3% of GDP, progress towards a debt/GDP ratio of

60% and continuing access to international capital markets.

     "Italy would de facto need to undergo tight fiscal measures and a debt

restructuring program to meet eligibility criteria," Giampaolo Galli, director

of the Catholic University of Milan's independent Public Accounts Observatory,

said in an interview, adding that "there is still time and scope for Rome to

further negotiate in favour of softer rules despite the Eurogroup's already

giving an initial green light to the reform."

     Galli, who has been tasked by the Italian parliament with weighing the pros

and cons of the ESM proposals and last week briefed the legislature, noted that

Italy's agreement in June had come at a time when the country was trying to

avoid an excessive deficit procedure.

     "The outlook has changed," he said.

     --SOFTEN THE TERMS

     The ESM reform treaty cannot come into force without ratification by all 19

eurozone national parliaments. While, if Italy were to veto the move, it would

"send a very negative message to Europe," Galli said that the country's

Treasury, together with the governing coalition's center-left Democrat Party,

may try to soften its terms in the coming weeks.

     Italy has yet to raise its concerns at EU level, according to a source

close to the Eurogroup, and an official at the country's Treasury could provide

no immediate comment on the matter. But an official with the Democrat Party

familiar with the issue told MNI that the ESM reform "has a few critical points

that play against Italy and would need be re-negotiated."

     Most parliamentarians from the 5-Stars Movement, also part of the coalition

and the largest party in Italy's lower house Chamber of Deputies, are now ready

to vote against the reform, according to an Italian source familiar with EU

issues.

     The proposals would grant the ESM sole responsibility for deciding whether

to provide bailouts. It would also permit the ESM to provide the banking union's

Single Resolution Fund with a E60 billion backstop by 2024, funded by each

member state depending upon its size.

     If it were approved and Italy then applied for aid and its debt deemed

"unsustainable," the country would be forced to undergo a pre-emptive

restructuring which might not be necessary, pushing up financing costs and

undermining stability, Galli said.

     "It looks to me like this reform was designed to fiscally shield virtuous

countries from the contagion of debt-vulnerable ones, and avoid burden sharing,"

he said.

     --With Additional Reporting By David Thomas In Brussels

     .

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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