Mammoth debt hangs over next Italian government

Fri Feb 22, 2013 4:53am EST
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By Francesca Landini

MILAN (Reuters) - Whoever wins Italy's elections this weekend will inherit a 2 trillion euro ($2.7 trillion) public debt that is draining badly needed funds which would be better used to spur growth.

At 126 percent of gross domestic product, Italy's debt is at its highest since World War One. Tough austerity measures since November 2011 by the outgoing technocrat government of Mario Monti pulled Italy from the brink of a Greek-style financial collapse, but did not stop the debt mountain rising.

In the run-up to February 24-25 parliamentary elections, all the main parties have put forward their own debt-cutting recipes.

The anti-establishment 5-Star movement wants to temporarily freeze the payment of interest rates on Italian government bonds - something that would essentially amount to default.

Silvio Berlusconi's People of Freedom party proposes a massive sale of state-owned assets, while the centre-left PD, leading in opinion polls, plans to privatize some companies and negotiate softer debt targets with the European Union, that is currently asking to cut to 60 percent of GDP in 20 years.

But analysts say investors should not expect any significant debt reduction in the short term given Italy's painful recession and its history of anemic growth rates.

Italy's debt cost 80 billion euros to service last year - equivalent to 5.5 percent of gross domestic product and four times the austerity budget implemented by Monti.

"What Rome could promise is to put the debt on a downward path with privatizations and policies aimed at boosting the growth rate of the economy," said Alberto Alesina, professor of Political Economy at Harvard university.   Continued...

A man walks past election campaign posters of PDL (People of Freedom) member Silvio Berlusconi in Milan, February 21, 2013. REUTERS/Paolo Bona