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By Silvia Marchetti
     ROME (MNI) - Even a fresh round of quantitative easing by the European
Central Bank would not be enough to shield Italy from a dangerous spike in its
bond yields if the country's recession deepens and it misses fiscal targets, the
director of the Public Accounts Observatory at Milan's Catholic University told
     "A return to QE could maybe help but if the current economic slowdown turns
into a real heavy recession with a 1% drop in GDP there would be a systemic
country risk spike which not even more purchases of Italian securities could
avert," Carlo Cottarelli, a leading economist and former IMF official who was
briefly prime minister designate in 2018, said in an interview.
     "If Italy is perceived as a risky country by investors the spread between
German and Italian bonds would significantly rise no matter how many bonds the
central bank is willing to buy."
     ECB officials say there have been no discussions of any return to net asset
purchases, and that current forward guidance, for rates to remain unchanged
until at least 2019, is in itself accomodative, but that QE remains in the
toolbox in a severe downturn.
     Italian government bonds would continue to be eligible for any additional
asset purchases by the central bank unless they were downgraded to junk by all
four major ratings agencies, a scenario Cottarelli called "far-fetched."
     Yet, while even in a crisis the difference in yield between Italy's 10-year
bonds and Germany's would be unlikely to approach the 580 basis points seen in
2011, any spike in yields would soon force the government to adopt an emergency
budget to reassure markets and meet Brussels' requests, he said. The spread is
currently about 250 basis points.
     Cottarelli's office forecasts that Italy's fiscal deficit will hit 2.5% of
gross domestic product this year, compared to the 2.02% target agreed with the
European Commission after difficult negotiations, and that, in the absence of a
fiscal corrective plan, the shortfall will jump to 3.5% in 2020, breaching EU
     "If the government intends to stick to its target of a deficit of 1.8% of
GDP for 2020 as committed to back in December it would need to clear a
corrective, tight fiscal package of up to E35 billion, and I don't see that
happening", said Cottarelli, noting that differences with Brussels are bound to
     The populist/far right government needs to find some E23 billion in order
to avoid an automatic spike in value-added tax next year, and another E10
billion to bring the deficit down to 1.8% of GDP. Its 2020 fiscal plan, which
will form the basis of next year's budget, must be approved by the government by
April 10.
     "The next budget law will be extremely thorny, especially as, if growth
continues to stall, it will be harder to reduce the deficit", said Cottarelli.
     "If at the end of the day fiscal commitments are not kept and clashes with
the European Commission continue, the key question is how will markets react,
what happens to the spread? One thing is certain: a 3.5% deficit is not well
     Government sources downplayed the need for more fiscal adjustment, although
deputy Economy Minister Massimo Garavaglia of the co-governing League party did
not totally exclude it if things deteriorated significantly.
     "For the time being this is something totally off-the-wall, (there's) no
need for it. We might reconsider the situation if we ever cross that bridge," he
told MNI.
     A source linked to the League's 5-Stars Movement partners ruled-out any
tough budget tightening plan ahead: "We have no intention of backing down but
want to accelerate towards more expansive measures, cut business taxes, and
support investments and internal demand".
--MNI London Bureau; +44 203 865 3829; email:
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