Analysis. The president of the European Central Bank has abandoned his typically neutral position to issue a dire warning to the Italian government: the current level of government debt is unsustainable and could blow up at any moment.

As Italian public debt soars, the government refuses to hear warnings

A frightful level of public debt, and capital flight due to fear: this is the latest verdict from the Bank of Italy about the health of our economy. Public debt has reached the impressive sum of €2.34 trillion. As European Central Bank President Mario Draghi has noted, the current macro-economic framework could blow up at any moment if no clear message is sent to the investors who have loaned such an enormous pile of money to our government.

Economy Minister Giovanni Tria is doing everything he can to prevent us from falling headlong into the abyss of deficit spending—but the two vice-prime ministers, Luigi di Maio and Matteo Salvini, with their bombastic announcements about the citizenship income, the flat tax and reforming the Fornero pensions law, are making it clear that they don’t want to hear about budget constraints. All this without ever explaining where the money will come from to implement these three reforms, which will cost around €100 billion.

On Saturday, di Maio was immovable on this topic: “The citizenship income must be in the budget. This is indispensable for the 5 Star Movement. We are doing the citizenship income. Let us put together the budget law, the real issue is that in recent years they have always been saying that there was no money, and then managed to find the money for banks and other groups.”

But let us look again at the raw numbers coming from the Bank of Italy. After Draghi’s stern warnings, the Governor of the Bank of Italy, Vincenzo Visco, analyzed the numbers on Saturday in great detail: in July, the government debt increased by €18.4 billion from the previous month, bringing it to the current total of €2.34 trillion.

The increase was due to a rise in Treasury cash and cash equivalents (from €31.6 billion to €80 billion), which more than offset the cash surplus of the public administrations (€15.1 billion). Fees and premiums for issuing and reimbursement, the revaluation of securities indexed to inflation and the changes in exchange rates added a further €1.9 billion to the total debt.

Breaking it down by subsectors, the Bank of Italy said the central government debt increased by €20.4 billion and local government debt decreased by €2 billion, while the debt level of the social security institutions remained virtually unchanged.

The specter of debt continues to loom ever larger, according to the officials at the Bank of Italy’s headquarters in via Nazionale—and this is alarming foreign and Italian investors. They have less and less confidence about the reliability of our government bonds and the strength of our economy, and are turning their sights toward other financial shores.

This is what happened in June and July. Considering also the fact that the spread remains in the high-risk range, one can understand why the ECB president directed a very serious warning at the Italian government, abandoning his neutral position in an unprecedented way.

In these conditions, it is very difficult to imagine being able to implement the reforms announced by the government. Ex-director of the IMF Carlo Cottarelli already said this clearly about the citizenship income and the Fornero Law reform: “These are things that we cannot afford. Some adjustments can be done to pensions and to the current social income program, but it is too risky for Italy to spend €10 billion per year, for the state of our accounts.”

“The Italian government,” Cottarelli explains, “has floated the possibility of increasing the deficit to very high levels, surpassing or getting perilously close to the 3 percent threshold, and as a result we have paid for this by an increase in the spread. There is no conspiracy against us.” The spread has indeed reached punishing levels.

The experts from the Il Sole 24 Ore business daily have done the math: “According to the April DEF (Financial Planning Report), Italy was expected to spend €62.5 billion on debt servicing for this year and €63 billion for the next—a year-to-year increase of 0.8 percent. But after the scares brought by the institutional crisis at the end of May, which continued with the discussions during the government’s first three months in office, both these numbers have to be revised. The official calculations will arrive together with the updated report, but for this year we can count on debt-related expenses moving closer to €63.5 billion, while for the next year this may rise to €68 billion. In such a case, the difference year-over-year would be 7 percent, more than double the growth of Italy’s nominal GDP predicted by the April report.”

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