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--Italy Debt Longer Maturity Profile Also Post-APP 'Buffer': Govt Official
--No CenBank Concern Over Potential Higher Rates: BOI Source
By Silvia Marchetti
ROME (MNI) - The eventual end of the European Central Bank's asset purchase
program (APP) will not negatively impact Italy's economic performance nor its
public debt sustainability, a senior government official told MNI in exclusive
"We are very optimistic that Italy will be prepared and quickly adapt to a
QE-less scenario thanks to a brighter economic outlook and to its declining
public debt," said Luigi Marattin, economic and finance adviser to prime
minister Paolo Gentiloni.
"If the current fiscal stance is maintained -- envisaging growth at 1.5%
for this year, a 3% debt cost and inflation rising again to levels below but
close to 2% -- when QE will likely terminate in September, Italy will be able to
fully cope with the change," he said.
Marattin dismissed fears that the end of the QE and thus higher interest
rates could trigger a rise in debt costs and in the yield spread between Italian
and German bonds. According to the official, the main reassuring factor against
such a backlash post-APP was the downward trend in Italy's public debt.
"This is the most important thing we need to look at: investors aren't
really concerned whether public debt is high, but if it's sustainable. Recent
data and projections indicate the debt reduction rate is accelerating and this
is what reassures markets at the end of the day," said Marattin.
--MATURITY PROFILE HELPS
He also noted that the average maturity of Italy's debt, currently about 7
years, is another advantage that will help soothe eventual interest rates and
yields spread spikes when the ECB will terminate the APP.
"Even if there were such a spike, which I deem unlikely, it would not be
overnight but spread-out across a relatively long 7-year period which extends
and strengthens debt sustainability," argued Marattin.
Italy debt maturity profile would thus act as a sort of "buffer" against
potential sovereign shocks in the APP's aftermath, he argued.
The debt-to-GDP ratio can still be reduced even if rates were to rise, he
said, as this would only gradually affect the average cost of the debt while
consolidated growth is the real key to cutting debt.
For the first time in years Italy's debt seems to be on an overall downward
trend. Rome's government has made progress in tightening public finances as the
European Commission watchdog requests greater orthodoxy.
The government recently revised its fiscal targets. Debt forecasts have
been cut to 130% this year from a previous 131%, to 127% in 2019 from 128.2%,
and to 123.9% in 2020 from previous 125.7%.
According to a Bank of Italy source, "there is no reason to be concerned"
as to what will happen in a future APP-less scenario.
"According to our estimates, inflation in Italy is set to slightly recover
over the next two years mainly thanks to an improvement in wages, and growth
will further consolidate," said the source.
The central bank recently upped GDP forecasts to 1.4% this year from a
previous 1.3%, and to 1.2% in 2019 and 2020. Over the next two years prices in
Italy are expected to increase by a yearly average of 1.5%, reflecting stronger
growth in wages.
"We've said this before: an increase in interest rates, if consistent with
the improved economic situation, is fully sustainable for the Italian economy.
The debt service capacity of households and firms should remain strong even if
borrowing costs rise considerably," said the source.
Above all, he noted, recent analyses conducted by supervisory authorities
indicate that Italian banks and insurance companies have little exposure to the
risk of an interest rate rise.
--MNI London Bureau; tel: +44 203-586-2225; email: firstname.lastname@example.org