April 8, 2013 / 3:56 PM / in 5 years

UPDATE 1-Italy public debt to rise 3 points after companies paid

* Ecofin had told Italy to lower debt in 2013

* Grilli says Italy “lucky” fiscal compact starts in 2015

* Grilli says confident EU to approve Italy’s accounts

By Francesco Guarascio

BRUSSELS, April 8 (Reuters) - Italy’s public debt will rise by at least three percentage points over the next two years due to government plans to pay some 40 billion euros of debts owed by the state to private suppliers, its economy minister said.

Italy’s debt hit a record 127 percent of gross domestic product at the end of last year, the second highest in the euro zone after Greece.

Vittorio Grilli told reporters after meeting European Economic and Monetary Affairs Commissioner Olli Rehn in Brussels that the impact of the government’s decree “could be a bit more” than three points by the end of 2014.

Grilli said Italy was “lucky” because new EU rules on debt reduction, included in a so-called “fiscal compact” will not kick in until 2015.

He declined to answer a question on the fact that Italy’s debt is now set to rise to close to 130 percent of output this year rather than fall as recently recommended by the EU council of finance ministers (Ecofin).

Italy’s targets for the fiscal deficit and public debt have slipped steadily over the last year, as a deep recession has taken a heavy toll on public finances.

Last month the outgoing government of caretaker Prime Minister Mario Monti hiked the target for the budget deficit this year to 2.9 percent of GDP from 1.8 percent, partly to allow the payments of the debt arrears to private firms.

When Monti took office in 2011, as worries about Italy’s debt intensified, he promised to balance Italy’s budget by the end of this year.

In 2012 the deficit came in at 3 percent of GDP, bang on the EU’s ceiling.

Grilli said after his meeting with Rehn that he was still confident the EU commission would remove Italy from a list of countries required to take corrective action because their deficit is deemed excessive.

“We should be out of the excessive deficit procedure in a few weeks,” Grilli said.

Rehn has previously expressed concern about the impact that the decision to pay the debts to companies will have on Italy’s finances.

In other remarks, Grilli said stagnant domestic demand in Italy was unlikely to post any recovery as long as the political situation remains deadlocked in the wake of February’s inconclusive national election.

Italy has been in recession since the middle of 2011. The economy contracted by 2.4 percent in 2012 and the government forecasts it will shrink by a further 1.3 percent this year.

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