MNI SOURCE: Higher Italy Funding Cost Ltd If Fiscal Tgts Met

By Silvia Marchetti

     ROME (MNI) - Italy must continue along a path of fiscal adjustment to

consolidate credibility and reassure investors that lend Rome some E400 billion

annually, despite being offered some protection from future tighter future

monetary policy by the lengthened maturity profile of its current debt, a senior

Bank of Italy source told MNI in exclusive comments.

     In their latest Financial Stability Report, the Bank of Italy said future

debt issuance costs will remain stable if Rome's fiscal targets are met and the

economic recovery continues, thus limiting an risks from the normalisation of

monetary policy.

     The central bank warned, however, that the high public debt makes Italy

vulnerable to tensions on the financial markets and to downward revisions of

growth prospects. 

     --LOOMING MATURITIES

     There are key debt reimbursement deadlines ahead. By December of this year,

what were issued at medium and long-term securities amounting to E134 billion

will reach maturity, with a further E201 billion set to mature in 2019. 

     Their roll-over on low coupons will depend on the continuation of both

favourable market conditions and investors having confidence in the

sustainability of Italian public debt, the source argued, both of which are key

to guaranteeing continued funding. 

     Italy's debt outlook looks stable at the moment, despite the current

political situation, but it is paramount that its downward trend as a percentage

of GDP continues to be believed by markets in order to limit future risks. 

     The fact that the European Central Bank will eventually switch to policy

normalisation mode and, at some point down the road, raise interest rates, is

not in itself a source of concern or an issue that will negatively impact on

Italy's debt sustainability -- but only as long as growth continues at healthy

levels, said the BOI source. 

     There are three main potential obstacles in the path to a lower overall

debt pile; lower than expected economic growth; if fiscal policy deviates from

its set path; if the current primary surplus buffer drops. 

     --SPREAD BLOW-OUT

     A further risk could be "market glitches" like the ones seen in 2011-2012,

triggering a sharp spike in the yield spread against German Bunds -- a condition

currently neither present nor close, but events in recent days have underlined

just how live that risk is. 

     "There is a safety headroom that acts as buffer for a potential rate hike

impact. Even if the new rates (on new bonds) increase by 2 percentage points,

overall debt cost will not rise. In the worst case scenario, it would just slow

down in the pace of decline but would still keep at stable levels," the source

added. 

     Italy started 2018 off with a slightly lower growth rate, in line with much

of the Eurozone, but it is seen as only a temporary slowing in pace and largely

weather-related. The Bank of Italy's recent growth predictions are in line with

those of the outgoing Democrat-led government, that has forecast GDP growth at

1.5% for this year.  

     The crucial point the central bank is trying to get across is that any

change in interest rates dynamics must be counterbalanced by equal growth

trends. 

     According to the BOI, after increasing by more than 30% since the beginning

of the financial crisis, Italy's debt-to-GDP ratio has remained broadly stable

over the last three years, thanks to the pick-up in growth and to persistent

primary surpluses.

     And, the source noted, such a favourable outlook should be firmly grasped

to further fiscal progress and boost the reform progress.  

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

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