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Fitch says Italy's recovery 'modest' as debt rises

Exports driver of growth as spendthrift consumers remain wary

14 March, 20:12
Fitch says Italy's recovery 'modest' as debt rises

(By Sandra Cordon) (ANSA) - Rome, March 14 - As a new report Friday on Italy's debt showed that it continued to climb at the beginning of the new year, ratings agency Finch warned that economic growth will be "modest" through 2015.

The lackluster news came at the end of a week that saw bond markets cheer multibillion-euro plans by Italy's new Premier Matteo Renzi to pay bills, cut personal income taxes, and inject cash into schools and social housing - part of a concerted effort to give the economy a lift.

But markets were also weighed down Friday by fears over the growing crisis in Ukraine, threats of sanctions against Russia, and the effect that could have on European energy supplies.

Italy's leading equity market the FTSE Mib, which rose after Renzi's plans were released earlier in the week, shed almost 1.2% in Friday's trading, closing at 20,346 points.

Fitch's comments in its Global Economic Outlook did not brighten the mood as it warned that Italy's recovery over the next two years will be "modest", with 0.6% growth in 2014 and 1% in 2015.

This year, growth will be driven primarily by exports, while the domestic consumer market is expected to remain stalled, said the ratings agency in an assessment very similar to one last week by the European Commission. Italy began to emerge from its worst recession since the Second World War in the second half of last year, although official statistics still registered a loss of 1.8% in the country's gross domestic product (GDP) in 2013. The economy is also weighed down by Italy's massive public debt, which rose to 2.0895 trillion euros in January, up by 20.5 billion at the end of 2013, the Bank of Italy said Friday. That played into recent comments by the EC, which complained Italy's 2014 budget, passed by former premier Enrico Letta, did not do enough to bring down debt, around 132% of gross domestic product (GDP).

As a result, the EC warned that it had put Italy under "specific monitoring" over its "excessive macroeconomic imbalances", which include high debt and poor competitiveness.

European Economic and Monetary Affairs Commissioner Olli Rehn was slightly more receptive to Renzi's package of tax cuts and investment designed to revive the weak economy.

Still, in its monthly bulletin, the European Central Bank complained Thursday that Italy has not made "tangible progress" on hitting budget-deficit targets set by the Commission.

It also warned that Italy must take "the necessary steps" to get the debt-to-GDP ratio "on a downward path". While Renzi has said he intends to keep the deficit-to-GDP ratio below the EU's 3% limit, and new moves would be financed through spending cuts and lower borrowing costs, he has suggested that other priorities matter as well.

He has said that the EU must focus increasingly on promoting growth and employment after years of austerity triggered by the eurozone debt crisis that led to unemployment reaching a record high of 12.9% in Italy, with over four in 10 under-25 out of work.

Helping Renzi to reduce debt and deficits are lower borrowing costs, which markets supplied on Thursday by holding down interest rates at government bond auctions.

The interest rate on three-year Italian bonds dropped to an all-time low at auction as the Treasury sold all 7.75 billion euros worth of the BTP bonds set to mature in December 2016 at an average interest rate of 1.12% - the lowest ever and sharply down on the rate of 1.41% at an equivalent sale last month.

It also sold two billion euros worth of seven-year bonds at an average interest rate of 2.71%, compared to 3.02% in February; and 2.21 billion euros of BTPs maturing in 2028 at 3.85%, down from 4.26% in a January sale.

Investors appeared to show confidence in Renzi's plans that included 10 billion euros in income tax cuts targeting low earners, 2.4 billion euros in business tax cuts, and 68 billion euros in payments on outstanding bills owed to Italian firms for government goods and services by July 1, when Italy takes over the rotating presidency of the European Union.