MNI: QE End To Force Italy Debt Cut, Whoever Governs - Expert

--ECB APP End Will Push Next Govt To Deal With Debt Issue 

By Silvia Marchetti

     ROME (MNI) - Italy's incoming government will have to deal with the ending

of the European Central Bank's asset purchase programme and its repercussions on

debt sustainability, a leading financial expert told MNI.

     "The central bank's finger-wagging will become more effective when APP

ends, causing a potential spike in Italian yields. Any political force that

rises to power must pursue a credible debt-reduction path," said Matteo Caroli,

economics professor at Rome's LUISS university.

     Last week, in its regular bulletin, the ECB warned Italy, along with

debt-ridden peers, to boost fiscal adjustment efforts now, before the window of

opportunity offered by the accommodative monetary policy stance shuts down.

     Despite arguing that the ECB's call is part of "the normal dialectic

between Frankfurt and member states' not to neglect crucial fiscal targets,"

Caroli warned however that Rome's current "laid-back scenario" over debt-related

concerns would come to an end when APP terminates.

     "Italy will be faced with a double challenge: the end of QE, which has

acted as a sort of protective shield to government securities, and an

inevitable, subsequent rise in interest rates that will follow. This makes it

all the more paramount to set in place a resilient plan to curb debt and

reassure financial markets," argued Caroli.

     --POPULIST SPENDING BOOM

     Both 5 Star Movement and the centre-right coalition, led by Lega, remain in

talks to form a new government after the Mar 4 vote. Yet both have pledged to

boost public spending in order to support growth and to revise the European

Union fiscal compact and deficit rules.

     Even the Democrats, now in opposition, believe debt can be reduced only

over a 10-year horizon.

     Caroli, however, expressed confidence that whichever party rises to power

will inevitably align behind a solid fiscal adjustment strategy as it cannot

afford to "deviate from the path so far followed and thus miss the (debt)

target".

     "Parties' rhetoric and promises must deal with reality, no matter what they

say to win votes. If the winners want to increase spending and cut taxes to

support families, they must find equivalent expenditure cuts or solely opt for

pro-growth measures that reduce the debt-to-GDP ratio in the long run," said

Caroli.

     --CUURENCY PROTECTION

     Significant progress has been made by the outgoing Democrat government in

tightening public finances, but balancing growth and fiscal objectives remain of

the utmost importance, he added, even if the populists end up governing.

     "All parties are aware that Italy can't afford to breach spending caps like

in 2011 when Silvio Berlusconi's government almost pushed the country to the

verge of a sovereign debt crisis, causing the spread in yield between Italian

and German bonds to skyrocket to 450 points," Caroli said.

     In his view, at the end of the day and no matter what their pre-vote

agendas were, both Lega and 5 Star are aware that Italy's future is within the

eurozone and that an exit from the single currency would be catastrophic for the

country.

     "Once out of the euro, our high public debt will become unsustainable. The

single currency shields us from potential sovereign shocks," stressed Caroli.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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