EU tells Italy to reduce fiscal gap or risk being fined

BRUSSELS (Reuters) - The European Commission warned Italy on Wednesday it risked disciplinary action if it did not adopt promised measures to cut its deficit, adding to pressure on a government facing possible early elections and rising euro-sceptic sentiment.

Italy is set to increase its huge public debt despite obligations to reduce it, and was already in line for disciplinary action that could trigger fines, Commission Vice President Valdis Dombrovskis said.

However, he told a news conference, the EU’s executive arm was waiting to see if Rome would deliver on its promise to take measures worth at least 0.2 percent of GDP by the end of April.

A disciplinary decision would only be taken after Brussels makes its next economic forecasts, which are expected in May.

Publishing a report on Italy’s debt, the Commission said the country needed to “credibly” enact those cuts in its structural deficit, which excludes the impact of the business cycle and one-offs. These cuts would in turn reduce the country’s debt.

The latest round of Commission economic forecasts for the 28-nation bloc showed Italy’s public debt would rise to an all-time high of 133.3 percent of gross domestic product this year from 132.8 percent in 2016.

Under EU rules, Italy needs to reduce its debt by about 3.6 percent of GDP annually.

In a separate report, the Commission said Italy was one of six EU countries, as well as France, Cyprus, Portugal, Croatia and Bulgaria, experiencing “excessive economic imbalances”, a situation which could also trigger sanctions.

Italy’s imbalances are mostly caused by its huge public debt, high unemployment and huge amount of bad bank loans.

“The stock of non-performing loans has only started to stabilise and still weighs on banks’ profits and lending policies,” the Commission said.

Recapitalisation needs that “may emerge” for some Italian lenders could occur “in a context of difficult access to equity markets,” it said.

The Italian government is in talks with the EU Commission to devise rescue plans for Banca Monte dei Paschi di Siena BMPS.MI and two Veneto-based regional lenders, as Italy's largest lender, Unicredit CRDI.MI, is seeking to raise 13 billion euros (£11 billion) in the capital markets.

EU economics commissioner Pierre Moscovici acknowledged Italy has implemented important reforms in recent years but stressed that “there seems to be a slowdown in the reforms”, when a faster pace would instead be needed for “modest” growth.

Editing by Philip Blenkinsop and Louise Ireland