May 29, 2018 / 9:58 AM / a year ago

Italy central bank says confidence at risk if debt not reined in

ROME (Reuters) - The head of Italy’s central bank sent a thinly veiled warning to the country’s anti-establishment parties on Tuesday, saying any moves to weaken the country’s public finances could undermine confidence and unwind years of economic reform.

FILE PHOTO: Bank of Italy Governor Ignazio Visco speaks during a meeting in Rome, Italy, October 31, 2017. REUTERS/Remo Casilli

Ignazio Visco made the comments to the bank’s annual meeting as the euro zone’s third-largest economy faces months of political turmoil. It is headed for snap elections, where its role in the European Union and euro zone is set to be the main issue.

“We must press on with the reform agenda,” Visco said as investors dumped Italian bonds, sending short-term borrowing costs soaring, and sold the euro and Italian stocks.

Italy’s two anti-establishment parties, the League and 5-Star, tried and failed to form a government after inconclusive March elections. They promise to ramp up public spending, seek changes to EU fiscal rules and roll back pension and labor reforms.

Visco said the Italian economy was finally recovering and its state finances improving after years of hardship, and that increasing the budget deficit was not the answer.

He said EU rules should be debated but he noted: “We are not constrained by the European rules but by economic logic.” He said there was no “shortcut” to reducing Italy’s debt, which amounted to more than 130 percent of its economic output.

Visco also signed off his speech with an apparent reference to a dispute between Italy’s head of state and the 5-Star and League, saying the constitution should be respected.

On Sunday, President Sergio Mattarella vetoed the parties’ choice of a eurosceptic as economy minister in their would-be coalition government, on the grounds that Italy’s euro membership had not been debated during the election campaign.

The League and 5-Star quit efforts to form a government rather than accept the veto. 5-Star wants the president to be impeached and has called for street protests against him.

“The rules of the game can be debated, even criticized; they can surely be improved,” Visco said in the context of Europe.

“Yet we cannot disregard constitutional constraints: protecting savings, balancing the accounts and respecting the (international) treaties. Above all we must never forget that we are only ever a few short steps away from the very serious risk of losing the irreplaceable asset of trust.”

Reporting by Mark Bendeich, editing by Giselda Vagnoni, Larry King

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