* Outgoing government promises to keep to 3 pct/GDP deficit
* Italy seeking ways to stimulate economy
* Paying back firms' credits will strain public finances
* Statistics bureau, central bank warn on recession
By Giuseppe Fonte and Naomi O'Leary
ROME, March 28 Italy will ensure it does not
exceed European Union public finance limits while honouring a
pledge to pay back 40 billion euros owed to private firms, the
outgoing government said on Thursday.
Economy Minister Vittorio Grilli said the repayments would
help counter a deep recession while pushing up the deficit
forecast to just below 3 percent of gross domestic product, the
ceiling set by the EU.
The European Commission expressed concern about the
decision, taken last week, for local governments to settle 19
billion euros in debts over the next two years, the health
system to pay 14 billion and central government to clear some of
"This can be thought of as a process by which first of all
liquidity is getting to businesses and then to the banks," as
the firms could pay back their debts in turn, Grilli told a
He said the deficit would be carefully monitored to ensure
it did not break the 3 percent limit.
But Grilli is serving in a caretaker capacity and is
unlikely to be in office for more than a few months at most, as
the country struggles to form a new government following
inconclusive elections in February.
Mario Monti's outgoing government said last week the economy
would contract by 1.3 percent this year compared to a previous
forecast of -0.2, and hiked the deficit target to 2.9 percent of
GDP from 1.8 percent, partly to pay back the firms.
A commission spokesman said the hike in the deficit target
had not been agreed with the EU and noted Italy's fiscal gap,
which came in bang on 3 percent in 2012, was dangerously close
to exceeding the limit.
Grilli said the repayments would prevent a deeper recession.
Without it, GDP would shrink 1.5 percent rather than the
forecast 1.3 percent, he said.
Following his comments, the Bank of Italy said paying the
debts "could improve financial conditions for many companies and
could be a way of stimulating economic growth," but also said
the deficit must not exceed 3 percent.
BoI economist Daniele Franco told parliament Italy needed
decisive and credible economic policies to address the
"recessionary spiral" which has seen the economy contract for
six consecutive quarters and by 2.4 percent in 2012.
However, both the Bank of Italy and national statistics
institute ISTAT said GDP this year may shrink more than the 1.3
percent forecast by the government, which would further weigh on
The chief economist of the Organisation for Economic
Co-operation and Development told Reuters the measure could help
the economy as long as debt limits were not exceeded.
"If that money is not given back to companies, the healthy
part of the Italian economy will suffer for the wrong reasons,"
Pier Carlo Padoan said in Paris.
Grilli said he had no knowledge of a possible downgrade of
Italy by ratings agency Moody's, rumours of which have troubled
financial markets this week, and said paying back the debts to
firms should be seen as a positive step by outside observers.
Fellow agency Fitch downgraded Italy's rating this month due
to its deep recession, rising debt and political uncertainty
after the election.