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Deadline looms for Italy to ease EU budget concerns

© AFP/File | Italy's Finance Minister Giovanni Tria (L) and EU finance chief Pierre Moscovici met in Rome last week

MILAN (AFP) - 

A deadline loomed Monday for Italy to respond to EU criticism over its populist budget, which has drawn a costly downgrade from one credit agency amid fears for the wider eurozone.

The government, which has until midday (1000 GMT) to reply to Brussels' concerns about the cost of its budget, was nevertheless bolstered by a stock market increase despite having its credit rating cut by Moody's.

Italy's proposed hike in public spending aimed at stimulating growth saw Moody's on Friday cut its rating from from Baa2 to Baa3, although with a stable outlook, meaning it will likely not downgrade the Italian economy again within six months.

"Moody's slightly lowered its rating for Italy, to Baa3, but gave it a stable outlook while investors expected a negative outlook. That in itself is good news," said Saxo Bank analyst Christopher Dembik.

The FTSE Mib Index was up by 0.66 percent at around 0830 GMT, having jumped by 1.82 percent to 19,428 points at opening.

Italian government bonds also rallied sharply, reflecting hopes the coalition government of the anti-establishment Five Star Movement (M5S) and anti-immigrant League might avoid a confrontation with Brussels over the budget.

Moody's on Friday cited concerns over the government's plans to increase public spending sharply after years of austerity, implementing election promises for a universal basic income and pension reform.

Increased spending could push the budget deficit up to 2.4 percent of annual economic output next year, triple the amount previously forecast and coming close to the EU limit of 3.0 percent.

That in turn will only aggravate Italy's already massive debt mountain, at some 130 percent of gross domestic product (GDP), way above the EU 60 percent ceiling and second only to Greece's in Europe.

- 'People's budget' -

The European Commission formally warned Italy last week that its plans for 2019 were a serious concern, sending a letter to Rome to warn that it did not rule out rejecting the entire budget.

Prime Minister Giuseppe Conte is to hold a press conference on Monday at the same time as the deadline for Rome to answer Brussels expires.

The downgrade from Moody's is the latest move by international financial watchdogs sounding the alarm over Italy's economic health.

Moody's cited a "material weakening in Italy's fiscal strength, with the government targeting higher budget deficits for the coming years," as well as debt holding near the current 130 percent of GDP "rather than start trending down as previously expected".

Aimed at fulfilling electoral promises, Italy's planned spending boost is what the government calls its "people's budget".

It includes a series of pension and tax changes that will cost 37 billion euros ($43 billion), of which 22 billion will be paid for by borrowings, expanding the deficit.

"I see that in a country with six million living in poverty, they are implementing plans to alleviate poverty," EU Economics Commissioner Pierre Moscovici said on Monday.

Rome "thinks that raising public spending will create growth (but) we're in a period of overheating and most economists think that this will not be the case," Moscovici told France Inter radio.

Nevertheless "the European Commission doesn't want a crisis between Brussels and Rome," Moscovici said. "Italy's place is in the heart of Europe and not outside."

Despite the brickbats from all sides, analysts say Rome is in a relatively good bargaining position given the eurozone's ongoing difficulties with Brexit.

"Italy is headed for a showdown with Brussels and I am not sure they have much to lose," Manulife equities head David Hussey told AFP.

"Given how damaging Brexit is to the EU project, a loss of Italy would be devastating and to be avoided at all costs -- hence I think (that) Italy's hand is quite strong."

© 2018 AFP