* Italy debt plan only credible if spread over 20 years
* Debt 126 pct of GDP in 2012, highest since World War One
* Primary surplus at 3 pct of GDP not enough to reduce debt
* Privatisation no panacea
By Francesca Landini
MILAN, Feb 22 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 Feb. 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 privatise 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 anaemic 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 privatisations and policies aimed at boosting the
growth rate of the economy," said Alberto Alesina, professor of
Political Economy at Harvard university.
"No one thinks Italy can push its debt down towards 90
percent of GDP in a few years. A credible plan to reduce it
would have to span 20 years," he said. "Italy needs a shock
therapy for its economy."
JUST AHEAD OF HAITI
Between 2000 and 2010, average Italian growth has been less
than 0.3 percent per year, making it not only the most sluggish
economy in the euro zone but the third most inert in the world,
ahead of only Zimbabwe, Eritrea and Haiti.
Between 2007 and 2013 the economy is expected to have
actually contracted by 7 percent and unless that trend is
reversed cutting debt is mission impossible.
"One of the biggest hurdles to reduce Rome's debt has been,
is and will be the lack of growth," said Fedele De Novellis,
economist at think-thank REF Ricerche.
The tax hikes and spending cuts undertaken by Monti's
government brought Italy's primary surplus - budget surplus net
of debt servicing costs - to around 3 percent of GDP at end
2012, the highest in the euro zone.
But that won't be enough if the economy doesn't grow, De
Analysts say the next government needs to boost the rate of
growth to at least one percent a year.
This, together with average borrowing costs stable at their
current level of 4 percent, would allow the government to reduce
gradually the debt-to-GDP ratio to 90 percent in the next 20
years, without having to hike the primary surplus further.
To spur growth Italy must also strengthen an unpopular
labour market reform, implement liberalisations, cut labour
costs and overhaul its painfully slow judicial system, said Luca
Mezzomo, head of macroeconomic research at Intesa Sanpaolo.
However, ratings agency Standard & Poor's warned this week
that Italy risked losing the reforms momentum unless a clear
winner emerges from the election.
Selling state assets would also help rein in debt. The state
owns roughly 30 percent of energy groups ENI and Enel
, while it is the sole owner of the postal service and
the railroad companies.
However, market prices are so depressed that privatisations
- a politically sensitive topic - would not be a game-changer in
terms of debt reduction.
A report by Istituto Bruno Leoni, a pro-market think tank,
estimated that if the Treasury sold all the company stakes it
holds - including in the state broadcaster RAI - it would reap
only 135 billion euros - lestt than 7 percent of the country's