Italy Seeks to Reassure Markets Its Deficit Is Under Control

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(Bloomberg) — Giorgia Meloni is seeking to reassure investors that Italy’s finances are under control, as markets fret about a ballooning deficit which could trigger a selloff.

The premier and Finance Minister Giancarlo Giorgetti are increasingly aware of the impact that a wider-than-announced deficit could have on bond yields and the ability to finance new measures, according to people familiar with the matter. 

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They are seeking options to limit the repercussions of worsening economic conditions and the one-time impact of a home-improvements incentive on their upcoming deficit forecast, said the people who asked not to be named on a confidential issue.

The government is planning to limit the deficit shortfall to below 4% next year, said the people, although final numbers have not yet been agreed on. Bloomberg reported earlier that the government is eyeing a deficit around 5% this year without factoring in the impact of the incentive, compared with a previous target of 4.5%. The number could be above 6% with the effect of the incentive.

To help achieve this, Meloni and Giorgetti are banking on economic growth of as much as 1% next year, the people added, but delivering on that won’t be easy. 

Italy is currently struggling to keep its finances in check amid dire economic conditions across Europe and renewed investor focus on Italy’s €2.8 trillion ($3 trillion) debt pile. Those worries are reflected in the steady increase in Italy’s 10-year yield, a barometer of risk.

Italy’s economic struggles are predicted to continue into next year, with the forecast for 2023 growth lowered again to 0.9%, followed by a 0.7% expansion in 2024, according to a survey conducted by Bloomberg News.

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Meloni’s accounting task is made more complex by the need to include in this year’s deficit the impact of the so-called Superbonus, which gave property owners tax credits for energy-related home improvements. The incentive program has cost Italy billions.

Newspaper Il Sole 24 Ore reported earlier Thursday that the deficit could reach 7% this year. In a note, the finance ministry said this number is not coherent with current economic data available.

The European Central Bank’s decision to raise the deposit rate by 25 basis points to a record 4% Thursday, acting for the 10th consecutive time, further dampens the outlook for Italy’s economy.

While ministers have already publicly aired the possibility of advancing the sale of state assets and pushing through a tax on extra bank profits, they’re now shifting focus to determine if it’s possible to withdraw commitments to fund Superbonus works that haven’t already started. Meloni said Wednesday that the value of expected receipts from the banks’ levy is just under €3 billion.

Meloni and her colleagues are under mounting scrutiny in advance of a deadline before the end of the month to file budget plans, with doubts growing among investors on Italy’s ability to support its debt mountain. 

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The right-wing coalition is in a bind as a toxic combination of weak economic growth and the need to accommodate accounting revisions requested by European Union officials impinge on their ability to fulfil pending promises to voters.

Morgan Stanley and Goldman Sachs Group Inc. this week said weaker growth in the euro area will drag budget revenues lower, upending the market calm and possibly putting an end to the nation’s bonds outperformance.

Italy’s bonds have long been considered among the region’s riskiest given the government’s debt. Yet they’ve benefited greatly from an ECB backstop announced last year to keep borrowing costs across the bloc’s disparate economies in check.

—With assistance from Aline Oyamada, Giovanni Salzano and Richard Bravo.

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