MNI EXCLUSIVE: Italy Looks To ECB, Recovery Fund To Meet Needs

Italy will look to the European Central Bank's emergency measures and the resources of the European Union including the EUR750 billion recovery fund to meet the liquidity requirements needed to boost its pandemic-hit economy rather than look to tap the European Stability Mechanism, a senior 5-Star official told MNI.

The ESM could be a risky tool for Italy, with potential to be used by EU institutions to impose new budget and policy conditions on countries that go to the Luxembourg-based lender for funding, Laura Agea, Italy's undersecretary for EU affairs, told MNI.

The ESM is still seen as a symbol of the EU's power over debtors, a legacy from euro debt crisis, Agea said, stressing Italy had already asked the European Union to tap its SURE unemployment scheme for EUR 28.5 billion and had good access to the capital market to finance its debt.

Not all agree with Agea, with the Democratic Party (PD), junior partner in a coalition government with 5 Star, believing it more appropriate to use health-spending targeted low-cost funds made available by the new ESM credit line, especially with the building risk of a second wave of coronavirus infections this fall.

"The ESM would make liquidity available at lower costs than the market," important for a country with debt levels like Italy's, Pier Carlo Padoan, a Democratic lawmaker and formerly Italy's Finance minister, told MNI.

Measures adopted to fight Covid-19 and the economic fallout has seen Italy's budget deficit balloon to 11.9% of national output this year, up from 1.6% in 2019, with the already bloated public debt expected to rise above 160% of GDP.

PEPP PROTECTION

All parties agree that Italy is currently protected by the ECB's monetary "umbrella", which remains on track to buy up to EUR1.35 trillion worth of debt through next June under its Pandemic Emergency Purchase Program (PEPP), with a large part likely to find its way to Rome.

"Currently the ECB role is very important, as it is buying a big chunk of Italian debt on the market. But this won't last forever," Padoan noted.

Carlo Cottarelli, director of the Public Accounts Observatory at Milan's Catholic University, doesn't see Italy tapping the ESM anytime soon, mostly due to political divisions, noting that ECB purchases alone cover almost 50% of Italy's financing needs for the rest of the year.

How long ECB funding lasts will "depend mainly on the inflation level," Cottarelli told MNI.

RECOVERY FUND

Italy is also set to be the biggest beneficiary in terms of both grants and loans issued by the EUR750 billion Recovery Fund approved by EU leaders in July, hailed in Rome as a political victory that will boost the recovery and help the country address some of its chronic problems.

Italy is set to receive just shy of EUR209 billion in grants and loans from the recovery fund, depending on the state of its economy. But the money only trickles down from next year, leaving Prime Minister Giuseppe Conti's government facing tough choices in October, when the new budget law needs to be drafted.

The delay in receiving funds is only one issue with the recovery fund, with both

Padoan and Cottarelli noting the stringent conditions attached – unlike with the ESM. The new fund allows EU member states to challenge how investments are planned and for what purpose -- something for which Italy does not have the best track record in Europe.

For this reason, monies from the recovery fund should be used for structural reforms and large infrastructure projects backed by the EU, Cottarelli said.

According to Padoan, Italy must show "a planning ability in implementing financial resources. The problem is to transform these significant funding into investment spending".

SUSTAINABLE

As the Italian government split over whether to use the ESM funds, both sides agree that Italy's debt remains sustainable in current market conditions.

Assuming a significant return of growth next year, Padoan "doesn't see problems for Italy's public finances".

With a return to growth, well utilized recovery fund resources and only gradual changes in ECB policy, "we can be optimistic," he added.